Monday, 7 January 2013
Higher Rate Taxpayers: How You Could Turn Child Benefit Losses Into a Win-Win
Entitlement to Child Benefit has now changed for many higher rate tax payers, but there are ways to reduce the impact through salary sacrifice benefits such as childcare vouchers.
Some form of universal Child Benefit has existed since 1946, with Child Benefit as we now know it introduced in 1977. However, in a political move to get higher rate taxpayers to pay more and help to address the UK’s deficit, entitlement to Child Benefit has changed from today.
After outcry from parents about the initial plans which would have affected all those in the higher rate tax band, only households where one parent earns over £50,000 will now be affected. If one parent earns over £60,000, you’ll lose the benefit completely. The change is expected to affect over a million families and the average loss in household income from the benefit will be around £1,300.
Things are set to become more complicated for those earning between £50,000 and £60,000. If this applies to you, you will receive the full benefit, but will then have to complete a self-assessment form at the end of each tax year and will be charged extra income tax to offset the Child Benefit payments received. For example, if you have income of £54,000 and your partner receives Child Benefit for two children of £1,752 for a whole year, the charge will be 40% of the £1,752 Child Benefit = £700. The percentage is determined as follows £54,000 - £50,000 = 4000 /100 = 40%.
For thousands of workers earning a little over the £50,000 threshold, there is a way to reduce the impact on household income from this change. The entitlement to Child Benefit is calculated on the individual’s net income after adjustments such as salary sacrifice benefits have been deducted. So if you are not already taking Childcare Vouchers, operated as an HMRC-approved salary sacrifice scheme, now is the time to do so. (Other salary sacrifice benefits such as cycle to work, car leasing schemes and pensions will also help parents to maintain their child benefit.)
Higher rate taxpayers can currently sacrifice up to £124 per month (£1,488 per year) in exchange for vouchers to pay for a range of registered childcare up to the age of 16. So if your income is a little over £50,000 a year, taking advantage of Childcare Vouchers could take your net income below the threshold where Child Benefit changes would apply. This is a win-win situation - not only will you maintain the amount of Child Benefit you currently receive, you will also receive the tax benefit from taking Childcare Vouchers, which are non-taxable and National Insurance exempt. As a higher rate taxpayer, you can currently save up to £624 per year if you sacrifice the maximum allowance. Both working parents can join a scheme to increase these savings (up to £933 per year for a basic rate taxpayer).
Busy Bees Benefits has been actively campaigning to increase the amount employees can sacrifice in exchange for childcare vouchers since the thresholds have not increased since 2006. If the campaign is successful it would create more savings for all working parents using vouchers and allow more higher rate taxpayers to take advantage of the child benefit loophole by taking childcare vouchers. For higher rate taxpayers, savings would increase by over £200 if the campaign is a success. To support the campaign, readers can sign the e-petition at http://epetitions.direct.gov.uk/petitions/31669.
If your employer offers a Childcare Voucher scheme, join it. If not, ask them to provide one – it’s a win-win situation for the employer too, decreasing their employer National Insurance contributions for every working parent on the scheme and improving staff recruitment, retention and morale.
If you earn just over £50,000 a year, reducing your net income by taking Childcare Vouchers could also mean you avoid having to complete a self-assessment tax return. HMRC estimates that around half a million people who previously didn't have to complete a self-assessment form will have to do so as part of the changes.
These changes are complicated and have been widely criticised as being unfair and unworkable. It is not based on combined household income, so two parents working and both earning just under £50,000 will keep all of their Child Benefit, whereas those with only one parent working and earning just over £50,000 will not. Also the new rules include an expectation that couples disclose to each other whether they claim Child Benefit, or earn above £50,000 a year, undermining the long-held principle of individual taxation.
Whatever your view, it makes sense to do what you can maximise your benefits and maintain your household income as far as possible while the changes are in place.