Among the fiscal updates announced in the April 2024 Budget were some positive measures for families. One was the long-awaited review of the high income child benefit charge (HICBC), which included both interim measures and a longer-term solution.
From 6 April 2024 an income tax charge applies to people who get Child Benefit and whose income (or partner’s income) is more than £60,000 in a tax year. The first rise since 2013.
Child Benefit isn’t means tested – it’s paid tax-free to most people with children, with no requirement to have paid National Insurance contributions at all. It’s important to note that Child Benefit itself isn’t being taxed or reduced – it will continue to be paid in full to the claimant. However, a tax charge will be calculated through a tax return on any partner whose income is more than £60,000 a year. If both partners have incomes over the £60,000 limit, the charge applies to the partner with the higher income. The tax charge will be one percent of the amount of Child Benefit received for every £200 of excess income. This is why the charge is the same as the Child Benefit received by people whose income is more than £80,000 a year. [(£80,000 – £60,000) ÷ £200 = 100%]
What can be done? The ‘income’ used by HM Revenue & Customs to calculate the charge is ‘adjusted net income’. Any pension contributions made by an individual, whether it’s a contribution to an occupational pension scheme or to a personal pension, will reduce the final amount of adjusted net income. If this is enough to get it below £60,000, the charge will be avoided; if it ends up between £60,000 and £80,000, the charge will be reduced.
Case study: Greg lives in England and has a taxable income of £68,000 and his wife Helen has no income. They have two children which results in Helen receiving Child Benefit of £2,212.60 a year, [(£25.60 + £16.95) x 52]. Since Greg’s income is £8,000 over the limit, he’ll face a tax charge of 40% of £2,212.60 = £885.04. As a couple, the overall value of the Child Benefit has therefore been reduced to £1327.56 (£2,212.60 – £885.04).If Greg makes net pension contributions totalling £6,400 in the tax year to a personal pension plan, this will be grossed up to £8,000. This means his adjusted net income falls to £60,000 and no charge is payable. By contributing £6,400, he’s saved £885.04. If all of the pension contribution lies in the higher rate tax band, he’ll also be able to claim an additional £1,600 in tax relief (20% of £8,000) through his tax return. So, his £8,000 pension contribution has in fact cost him £3,914.96 (£6,400 – £885.04 – £1,600).
For more information contact Tristan Wilcox-Jones, Samantha Gillham or Lucas Knight on 01225 445507.
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