HIGHER earners will feel the cold wind of George Osborne's Budget when child benefit is cut or scaled back in the new year.
The benefit is currently paid to all households with children, regardless of income. From January 7, households where one parent earns over £50,000 will have benefit clawed back until it is withdrawn completely if one person earns more than £60,000.
Parents currently receive £20.30 a week for the first child, and £13.40 a week for each subsequent child. It is paid until each child reaches 16, or 18 if they are in full-time education.
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HOW MUCH WILL I LOSE IF I NO LONGER QUALIFY?
Loss of the benefit will cost families with three children and at least one parent earning more than £60,000 about £2450 a year, which is the equivalent of a £4000 pay cut. A family with two children aged one and three at the start of next year would lose just under £39,000 in total by the time the youngest child reaches 18, according to PwC, the accountant. A three-child family stands to lose more than £50,000. Susannah Simpson, tax director at PwC in Scotland, says: "Our analysis shows the overall cost to families could be substantial over time. While many middle income families will probably not even have considered what the true cost to them could be, the reality is many may now find they will have to work longer until retirement or until they can pay back debts."
my salary is just under £50,000. is my benefit safe?
Your income means all your income, so includes your salary, bonuses and overtime. You must also add any rental income or the return on savings and investments. However, the figure is calculated after the payment of any pension contributions.
There are some anomalies. For example, if both parents work and each earn £49,000 they will keep the benefit, even though the household income is £98,000 – well above the £50,000 starting threshold. A parent who earns money taxed abroad would also sidestep the cut, even if their salary was higher than £50,000.
WILL I HAVE TO TELL MY PARTNER WHAT I EARN?
The changes mean parents will have to be open about their earnings, which might cause tension in some households. The higher earner will also have to pay the tax charge, even though the lower earner might claim the benefit. Collette Kerr, tax adviser at Edinburgh-based law firm Gillespie Macandrew, adds: "A taxpayer may be paying the charge in respect of a partner's children who are not his or her own children.
"Also, how does a taxpayer know how much their partner is earning, are they in receipt of child benefit, who has to pay the charge, and when does the charge commence, if a relationship has only just started?"
Families where at least one parent earns more than £50,000 basically have two options. They can choose to stop child benefit payments from January 7 and avoid the High Income Child Benefit Charge, or they can continue to receive the money, declare the payments and pay the charge.
Many on higher incomes might be tempted to give up child benefit. But John Whiting, tax policy director of the Chartered Institute of Taxation, says: "It's probably a good idea to stay in the system in case your personal or financial circumstances change. At the very least, you gain a tax flow advantage if you claim the benefit now and pay the tax charge later."
And you should always put in the initial claim for child benefit when your children are born, even if you earn well over the threshold, as it could affect your entitlement to the state pension and other benefits.
How much is the high income child benefit charge?
The tax charge will never be more than the benefit you have received. So, if you earn £60,000 or more, you will simply pay back the full amount of child benefit. The calculation is a bit more complex if you earn between £50,000 and £60,000. Then you pay a charge of 1% of the benefit for every £100 above the £50,000 threshold.
The charge would be collected through the self assessment system and would not be due until January 2014. Mr Whiting says: "Many people will be forced by the changes to complete a self assessment tax return for the first time." In the event of mistakes or oversights, "it would be nice to think that HMRC will start with a light touch and be reasonably sensible, but there is no guarantee".
The way to get round the cuts to is to lower your income – and the easiest way is to pay more into your pension. Ricky Murray, tax partner at Johnston Carmichael in Glasgow, says: "Making additional pension contributions can be hugely tax efficient for those with incomes just over £50,000. For example, in a family with four children where one parent earns £55,000 and the other nothing, the high income child benefit charge would be 50% of £3146, which translates to £1573. By making a net pension contribution of £4000 the earning parent would obtain higher rate tax relief of £1000 and also avoid the charge."
Parents can also sacrifice part of their salary for child care vouchers or to make charitable donations using Gift Aid.
Of course, you must be able and willing to cope on a smaller salary. You should also bear in mind that redundancy payments and the state second pension can be based on your salary.