How to beat the proposed child benefit cuts

Ways to keep your child benefit if you're affected by the cuts.

Last week George Osborne announced his plan for Child benefit to be axed for those earning over £44,000 a year. Since then there has been a public backlash lead by middle England. Unfortunately there may be little chance that George will go back on his plans so we may as well get used to the idea.

So is there anyway of avoiding the cut?

Those people who will suffer the most from the proposed cut may well be the ones who can do something to hang on to their child benefit i.e. families where the sole breadwinner earns around £44,000.

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.

3 ways to beat the child benefit cut

• 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. But if you want to explore this option then you may need to do so sooner rather than later as the generosity of this scheme is to be cut for high rate tax payers not signed up by the end of the current tax year.
• 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 medical insurance or additional holiday.
• 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.
• 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.

Is there anything else I can do?

Watch this space. The proposals could well change and there is talk of the coalition government making tax concessions for married couples by 2015 (such as transferable allowances). But the proof is in the pudding.