The Child Benefit Tax Charge, also known as the High-Income Child Benefit Charge (HICBC), can be a bit confusing. Let’s break it down in simple terms and explore ways to avoid it.
Child Benefit is a payment from the government to help with the costs of raising children.
In the current tax year 2024/25, you can receive £25.60 /week (£1,331 a year) for your eldest child and £16.95 / week (£881 a year) for each subsequent child.
However, if you or your partner earn more than £60,000 you have to pay back some or all of this benefit through the Child Benefit Tax Charge. The amount you need to repay is 1% of the benefit received for every £200 you earn over £60,000 in the year.
Example:
Once your earnings reach £80,000 you have to pay the full benefit back.
There are several strategies you can use to reduce or avoid the Child Benefit Tax Charge:
Increase Pension Contributions:
By contributing more to your pension you can reduce your taxable income. Using the same example above, if you contribute £5,000 gross to a pension this saves 50% of the Child Benefit tax charge, i.e. £334. Making this contribution provides 46.6% tax relief. This is because you're benefitting from 40% income tax relief on the pension payment, but also saving on the Child Benefit Tax Charge. To avoid the full amount in the same example, you need to make a £10,000 pension contribution which would only cost you £5,334, saving you £4,666.
It's also worth noting, the 46.6% tax relief could be much more if you have more than 1 child and you're receiving more child benefit payments than the example noted above.
This is a great way to avoid the charge and make your funds work much better for you. However, you need to make sure you have the right pension in place and this is also working in your best interest, which is something we can review and assist with as part of our advice.
Q- What if both partners each earn £60,000, there's a total household income of£120,000, do we need to pay this back?
A- No. This is a flaw in the system, you may have one individual earning £80,000 and their partner not earning anything. Under this situation any child benefit payments need repaying in full. However, a joint couple with equal earnings as per above may have a higher household income but they don't need to pay anything back. The child benefit received is assessed only on one individual which is the highest earner. This doesn't sound fair and in all honesty it's not, but these are the rules set by the government that many feel frustrated by.
Q-If you consistently earn over £80,000 is it better not to apply and receive the benefit?
A-Not always. If you have one partner not earning and the other who consistently earns more than £80,000, then you should still have the partner with no income apply for the benefit, even if they opt not to receive it. The reason for this is because they are still entitled to National Insurance Credits which count towards the future state pension entitlement.
Q-Are there other ways to reduce the child benefit tax charge?
A-Yes, you can also make charitable donations or if your employer operates any salary sacrifice arrangements, this is another way to reduce your net salary to bring the tax charge down.
The Child Benefit Tax Charge can be a financial burden, but with careful planning you can avoid it. Increasing pension contributions, making charitable donations and utilising salary sacrifice schemes are effective ways to reduce your taxable income and keep more of your Child Benefit.
By understanding and applying these strategies you can better manage your finances and make the most of the benefits available to you.
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