Reader Question: How can a high rate tax payer keep their child benefit?

 Reader Question:

I am currently a basic rate tax payer but am in line for a pay rise which will push me into the high rate 40% tax bracket. My wife is a stay-at-home mum so has no earnings in her own right. As I understand it if I become a 40% tax payer we will lose my child benefit. Is there any way a high rate tax payer can keep their child benefit?

 

My response:

For those who don't know, under current proposals the Chancellor George Osborne, plans to stop families receiving child benefit where one or more parents are high rate tax payers . The threshold beyond which you become a 40% tax payer is £42,745 (for the 2011/12 tax year).

Unfair loophole

But under current proposals if both parents earn under the 40% threshold they would keep their child benefit. So if for example both earn £40,000 a year (a total of £80,000) they would keep their child benefit while a family where just one parent earns £45,000 would not.

 

So is there anyway of avoiding the cut?

On the face of it it would appear the secret to keeping your child benefit is to reduce your taxable pay to below the 40% tax threshold. Fortunately there are ways of doing this without taking a pay cut.

 

4 ways to beat the child benefit cut

1.  Childcare vouchers – if your employer is signed up to the national scheme you could swap some of your gross salary for tax-free vouchers, up to certain limits, to pay for nursery care and pre and post-school club fees for children aged up to 16.
2. Salary sacrifice – if your employer runs a ‘salary sacrifice scheme’, you could give up part of your salary in exchange for other benefits such as additional holiday.
3. Make additional pension contributions – by paying more into a pension you could reduce your taxable income to below the 40% tax threshold. The trade off is that you will lose access to your money until you are aged 55.
4. Become a company - you could make yourself a private company and pay yourself an income below the level for income tax or NI contributions. In addition you could pay yourself a dividend from the company you have created, and as long as your total income is below the 40% tax threshold no further tax is payable. There will, however be tax to be paid by your company on these dividends at the rate of 20% if they are below £300,000. Creating a company is not really a possibility for employees as there are anti-avoidance rules to negotiate but it is a definite option for self-employed, freelancers or consultants. Obviously this would mean more paperwork for you or your accountant but the tax saving could well make it worthwhile.

But I must stress that the child benefit proposals have not been formalised so you are best waiting to see what is formally announced in the coming weeks. There has been a lot of speculation that the Government will water down their initial proposals to mitigate the unfair loophole.

I hope that helps.

Damien

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