George Osborne had originally planned to withdraw child benefit from all higher rate tax-payers, but had a change of heart in his 2012 Budget announcement, following criticism that this would be unfair on single income families and those earning just over the higher tax rate threshold.
From January 2013, the only people to lose their child benefit altogether will be households where at least one person is earning more than £60,000. Those earning between £50,000 and £60,000 will see their child benefit withdrawn on a sliding scale as their income increases.
Confusingly, benefit payments will not actually stop, even for those above the £60,000 threshold, although this can be requested by contacting HM Revenue and Customs. Instead, the Government will continue to make the payments and then take the same value back through an additional income tax charge.
The same arrangement will apply to those in the £50,000 to £60,000 salary band, but the additional income tax charge will be equivalent to 1% of their child benefit for every £100 they earn above the £50,000 threshold. If both parents earn more than £50,000 then the charge will apply to the higher of the two incomes, regardless of who actually receives the child benefit payments.
So, what can you do to keep your child benefits if you are a higher rate tax-payer? The answer lies in your taxable income. If you can reduce this then you will reduce the additional income tax charge you have to pay.
There are a couple of options available here. The first is to increase payments into a personal pension scheme thereby reducing the income tax charge on your child benefit if you are earning between £50,000 and £60,000. If you do not yet have a personal pension then this could be the ideal time to consider one.
Another option is to consider sacrificing an element of your salary in return for childcare vouchers, which are both tax efficient and would not form part of your income for these purposes, therefore enabling you to keep more of your child benefit payments.
Alternatively, if you are self-employed or work on a freelance or consultancy basis then it may be worth registering yourself as a private limited company, which would qualify you for corporation tax rather than income tax. It may be possible to plan both the level and timing of your income more effectively using a company structure. Whether this is a viable option will depend very much on your own personal circumstances, including how much of the additional income tax charge you would have to pay. It is also only likely to be open to those who are not directly employed by a single company due to the impact of the personal service company rules.
Tax is a complex matter and you should always seek professional advice from a qualified accountant before making any decisions which could alter your entitlement to income or tax liabilities. At Milsted Langdon, we can advise on whether any of the above options are right for you, as well as on any other tax matters.