Former independent financial adviser (IFA) Jason Butler shares some simple tips for families who want to reduce their tax bills while keeping their child benefit payments.
Summary
Child benefit can be claimed if you’re responsible for a child under 16.
The current benefit for the 2024/25 tax year is £25.60 per week for the first child.
A tax will be levied on the household’s highest earner if that person's taxable income exceeds £60,000 a year
You can ask HMRC to stop payments if you're likely to exceed the threshold
For many years, the child benefit tax charge for higher earners has been impacting those who qualify for child benefits.
The implications of this charge aren't immediately obvious, so read on to find out how it may affect you and how to reduce your exposure to this tax while continuing to receive child benefits.Who can claim child benefit?
Child benefit can be claimed if you’re responsible for a child under 16.
Once a child reaches this age, it may still be possible to claim child benefit until their 20th birthday, if they remain in approved education or training.
The current benefit for the 2024/25 tax year is £25.60 per week for the first child and £16.95 for each additional child.
So, in a single year, a couple with one child would receive £1,331.20, and a couple with two children would receive £2,212.60.
The child benefit tax charge for higher-earning parents
A tax charge will be levied on the household’s highest earner if that person's taxable income exceeds £60,000 a year and you or your partner get child benefit.
You may also have to pay the high income child benefit charge if someone else receives child benefit for a child living with you and pays at least an equal amount for the child’s upkeep.
The threshold was recently raised from £50,000 to £60,000, with the upper limit increasing from £60,000 to £80,000.
Once taxable income exceeds £80,000 in a tax year, the charge will be 100% of the benefit claimed, negating the benefit received.
What’s your adjusted net income (ANI)?
The income figure used to test against the £60,000 child benefit tax charge threshold is the same to assess entitlement to the personal allowance and age-related element of the personal allowance.
It is known as adjusted net income (ANI) and is calculated by adding up the total taxable income, including rental income and interest, or taxable profits if self-employed and deducting trading losses (for self-employed), pension contributions and Gift Aid charitable donations.
The personal allowance should not be deducted in arriving at ANI.
If the net amount is below £60,000, then no child benefit tax charge is payable.
When to pay child benefit tax
Is it worth making a claim for child benefit in the first place? Not always.
Where the high-income parent has sustainable taxable income of over £80,000 per year and they can’t or don’t want to act to reduce this, and the other parent is accruing entitlement for a state pension via national insurance (NI) contributions, it may not be worthwhile to claim.
However, if a parent stays at home to look after a child and doesn’t work or pay NI, they should claim child benefit for a child under the age of 12, as this will protect their entitlement to a state pension by giving NI credits for each year they claim it.
How to stop the child benefit charge
To avoid a tax charge if you’re likely to exceed the threshold, the parent should ask HMRC to stop the payments.
The higher-income parent will only be taxed on any payments received up to the date they stop.
A self-assessment return must still be filed by the higher earner if any payment is received in a tax year. Payments can be restarted if circumstances change.
Depending on your circumstances, preferences and resources, there are several potential ways that you might reduce or completely avoid the tax charge.
It may be that a combination of these planning ideas, which all involve reducing your ANI, might work for you.
Make a pension contribution
Provided you have sufficient earnings and a remaining pension annual allowance in the current tax year, you could make a personal contribution to a registered pension.
The pension contribution would reduce your ANI and potentially wipe out the child benefit tax charge. You may also qualify for 40% higher income tax relief on the contribution.
If one parent is a high earner under child benefit tax rules, but contributions are paid to a pension for the other parent who does not meet the high earner definition, it may be advisable to redirect these to the higher earner’s pension.
Salary sacrifice
With your employer’s agreement, you could reduce your contractual income for an equivalent employer payment to your pension, known as salary sacrifice.
In addition to the tax savings, you will also save on NI contributions.
Charitable gifts
Cash gifts to charity under Gift Aid reduce taxable income like an individual pension contribution.
Similar to pension contributions, Gift Aid payments are paid net of basic rate tax.
The value of a gift of investment holdings or real property at full market rate will be fully deductible from ANI to determine whether or not your ANI exceeds £60,000.
Transfer income-paying investments to your spouse
If the person assessed for the tax charge is also the holder of income-paying investments, consider transferring these to their lower-income spouse (or civil partner).
As the gross value of savings income is included in taxable income, this could make a difference.
