How can I avoid the high income child benefit tax charge?


Child benefit is tax-free. However, if either you or your partner earns more than £50,000, then some (or all) of the benefit is repayable as a “high income child benefit tax charge”.

The key fact is that only one of you needs to earn more than £50,000 to trigger the repayment.

This charge is calculated as 1% of the child benefit received for every £100 by which your income exceeds £50,000. If your income is £60,000, you repay all of the child benefit.

Example

You have two children and received £1,788 in child benefit last year. You earn £56,000 for the year. You must repay 60% of the child benefit.

This is calculated by 1% x (£56,000 – £50,000)/£100 = 60%. Therefore, you will repay £1,788 x 60% = £1,073.

If you know that your income (or your partner’s) will exceed £60,000, you can stop claiming the benefit rather than claim it and repay it.

How can I avoid the charge?

There are a few ways that you can avoid the charge. These are especially valuable if you have a few children.

Timing

If you own your own business, you can choose the timing of dividends. Therefore, you can delay dividends until after 5 April to keep your income below £50,000 and keep the child benefit.

If the children are nearly 16, you might delay the dividends until the tax year after the benefits stop.

Splitting your income

If one partner earns more than £50,000, you start to lose the benefit. Over £60,000 and it’s all repayable. This is even the case if the other partner doesn’t earn anything.
However, if you both earn £49,999 you’ll keep all of the child benefit.

Therefore, if only one of you and your partner earns more than £50,000, you could reassign some of the income to the lower-paid partner.

For example, this could be dividend income by transferring shares.

Reducing your income

The income used to assess Child Benefit will be your “net” income. This means that, even if you earn more than £50,000, you can avoid losing the benefit by taking steps to reduce this “net” income.

For example, pension contributions are deducted from your income to calculate net income. Similarly, childcare vouchers purchased through an approved scheme are deducted.

Summary

You may be able to keep the child benefit through planning in advance. If you need any help, please get in touch.

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Any questions?

If you’d like a meeting or a Skype call with a Liverpool accountant to discuss this, please give us a ring on 0151 380 3800 or drop us an email at [email protected].

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Added by Jon Davies
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