How to avoid losing child benefit
The widely reported proposals on child benefit are that families where at least one parent is a higher rate taxpayer - earning more than £43,875 a year - will lose their child benefit.
With the benefit at £20.30 per week for the first child and £13.40 per week for subsequent children, it is a lot to lose.
As proposed, it is an all or nothing situation. Those below the higher rate tax threshold will receive the benefit, those above it will receive nothing.
So those on the cusp of the higher rate may want to stay below it or face the prospect of a pay rise wiping out their child benefit.
For example, a £1,500 pay rise taking someone from £43,000 to £44,500 could cost them over £250 if they are a parent of a family with two children.
This is because going over the higher rate tax threshold would result in them losing annual child benefit of £1,752.40.
Although the finer detail of this proposal is yet to be confirmed, is there anything employers and/or employees can do as no one wants to turn down a pay rise - especially in this climate?
"Salary sacrifice" can perhaps help, although this will depend on the final details of the rules. This is where salary is given up in exchange for benefits such as pension, childcare vouchers, company cars, cycles for work, and car parking.
Depending what is offered by employers there are a wide range of tax-free benefits employees could look into in order to reduce their taxable pay and meet still their own needs.
Additionally restructuring existing benefits, such as pension contributions, to use a salary sacrifice arrangement can enable both the employee and employer to make National Insurance contributions (NIC) savings.
For those where salary sacrifice is already offered, employees may want to consider opting into a sacrifice or increasing the amount they already sacrifice.
In looking at this, people need to consider their own needs.
If employees are already making pension contributions, switching to salary sacrifice could be a win-win for the employer and the employee from a NIC saving perspective and also enable the employee to retain their child benefit.
However, if an employee is already sacrificing into pensions, sacrificing a larger amount into pension would mean that the amount of cash remuneration the employee receives will be reduced, and while they may be able to keep the child benefit this will not necessarily help their cash flow as the benefit from the pension contributions will not arise until retirement.
Seeking good advice on these options is essential to ensure all related benefits including state benefits such as Second State Pension are considered, and thought given on an individual basis as to whether this is an appropriate course of action.
So how would it work?
Bearing in mind that the final rules are yet to be announced, here are some illustrations of how a salary sacrifice approach might operate:
- An employee earning £45,000 currently making 5% pension contributions out of their net pay would have taxable pay of £45,000 and would therefore not be entitled to the child benefit. If that individual arranged with their employer to do this via salary sacrifice their taxable pay would be reduced to £42,750. They would then pay tax at the basic rate and would become entitled to the child benefit, as well as making NIC savings on the contributions
- An employee earning £47,000 currently making 5% pension contributions via salary sacrifice would have taxable pay of £44,650 and would therefore not receive the child benefit unless they decided to put more into their pension scheme and then reduce their taxable pay further
- An employee earning £50,000 could choose to sacrifice £7,000 per annum in return for a company car reducing their earnings to £43,000. Where the car is a low-emission car this will also result in further tax and NIC savings.
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