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Child benefits squeeze on households may be eased by pension contributions scheme

FOR those households hit this week by the squeeze on child benefits, grandparents could ride to the rescue.

Last Monday was the deadline for households with an income of £60,000 or more to opt out of child benefit, rather than pay it all back in tax through complicated self-assessment.

But households on £50,000 to £60,000 only lose 1% of their benefit for each £100 of salary over £50,000, providing an incentive to reduce eligible earnings.

Vince Smith Hughes  at Prudential said: "One way of reducing salary for the child benefit test is in pension contributions, and one angle is you could have a grandparent paying in contributions."

The contributions would be gifted by the grandparent to the parent, enabling the parent to deduct the pension contribution from his taxable earnings. Someone on a £60,000 salary whose parent made a £10,000 annual pension contribution would retain all his child benefit.

He said: "The child might be 45 years old. But if he was on £60,000 and his parent made a £10,000 pension contribution, he would get his child benefit back."

Jason Hollands at investment advisers Bestinvest said: "At £20.30 a week for a first child and £13.40 per additional child, a family with three children caught by the new rules faces the prospect of being £2450 worse off a year, equivalent to nearly a £4000 pay cut for a 40% taxpayer."

He said a pension contribution would also attract tax relief, and for a three-child household on close to £60,000 it could double the benefit.

He said: "For a family due to lose £2450 of child benefit and subject to 40% income tax, a net pension contribution of £9800 will be grossed up to £12,250 in the pension plan, but a further £2450 could be reduced from their tax bill via self-assessment."

Mr Hollands says if you are married or in a civil partnership then consider transferring income-producing assets from the higher earner to the lower or non-earning partner.

He said: "If your partner does not work, you could turn a big chunk of taxable income into tax-free income by utilising their annual personal allowance (currently £8105 and set to rise next year to £9205). Of course, it is vital to realise you are legally passing all ownership, so this is not to be taken lightly."

The new rules may act as a spur for better financial awareness, according to Derek Allen, director of tax at the Institute of Chartered Accountants of Scotland, which says around 500,000 people will now have to fill out self-assessment tax returns for the first time.

He said: "The resulting administrative costs have probably been underestimated and it will simply encourage people to look at options to lower their income and remain under the threshold.

""People also need to be aware that their annual bonuses could tip them over the threshold, leading to claw back payments being demanded by HMRC."

Mr Allan says accountants have been busy dealing with questions on additional pension contributions, salary sacrifice agreements where employees take more holiday and less pay, capital allowances, and gift aid.

He said: "Someone earning £49,000 who is offered a pay rise could refuse it, opting to make a larger pension contribution."

Richard Brunton, tax manager at HBJ Gately, says an employee on £52,000 could ask his employer to pay a £50,000 salary and a £2000 pension contribution.

He said: "This means their child benefit allocation would be intact and their pension pot will be healthier. Indeed, the employer could offer to share the National Insurance savings such a scheme would create."

For the self-employed, Mr Brunton said a couple should aim to balance their earnings to bring them both below £50,000.

He said: "Where a husband earns a total of £60,000 and the wife earns £25,000 as it stands the family would lose its entire child benefit. However, if profits are managed better by allocating them to the lower-earning partner, individual earnings could be taken down to £42,500 each."

Where a husband and wife are shareholders in a limited company, the pattern of salary and dividends can be similarly adjusted to keep both individuals below the £50,000 threshold, he said.

He said: "Other tax considerations might apply here so anyone in this situation should discuss it with their accountant or tax adviser before taking action."

A self-employed individual can also claim a 100% tax deduction up to £25,000 on 'plant and machinery' which qualifies for the Annual Investment Allowance – such as new computers.

Mr Brunton concludes: "Gifts to charity are also tax deductible so if the high earner was earning £52,000 a gross charity gift of £2,000 would reduce their child benefit liability. Most people make gifts to charity net of 20% basic rate tax, so to make a gross gift of £2000 the individual needs to write a cheque for £1600."

Contextual targeting label: 
Families

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