Partner Article

How to offset Child Benefit losses

Some form of universal Child Benefit has existed since 1946, with Child Benefit as we now know it introduced in 1977. However, in a political move to get higher rate taxpayers to pay more and help to address the UK’s deficit, entitlement to Child Benefit is set to change from 7th January 2013.

After outcry from parents about the initial plans which would have affected all those in the higher rate tax band, only households where one parent earns over £50,000 will now be affected. If one parent earns over £60,000, you’ll lose the benefit completely. The change is expected to affect over a million families and the average loss in household income from the benefit will be around £1,300.

Things are set to become more complicated for those earning between £50,000 and £60,000. If this applies to you, you will receive the full benefit, but will then have to complete a self-assessment form at the end of each tax year and will be charged extra income tax to offset the Child Benefit payments received. For example, if you have income of £54,000 and your partner receives Child Benefit for two children of £1,752 for a whole year, the charge will be 40% of the £1,752 Child Benefit = £700. The percentage is determined as follows £54,000 - £50,000 = 4000 /100 = 40%.

For thousands of workers earning a little over the £50,000 threshold, there is a way to reduce the impact on household income from this change. The entitlement to Child Benefit is calculated on the individual’s net income after adjustments such as salary sacrifice benefits have been deducted. So if you are not already taking Childcare Vouchers, operated as an HMRC-approved salary sacrifice scheme, now is the time to do so. (Other salary sacrifice benefits such as cycle to work, car leasing schemes and pensions will also help parents to maintain their child benefit.)

Higher rate taxpayers can sacrifice up to £124 per month (£1,488 per year) in exchange for vouchers to pay for a range of registered childcare up to the age of 16. So if your income is a little over £50,000 a year, taking advantage of Childcare Vouchers could take your net income below the threshold where Child Benefit changes would apply. This is a win-win situation - not only will you maintain the amount of Child Benefit you currently receive, you will also receive the tax benefit from taking Childcare Vouchers, which are non-taxable and National Insurance exempt. As a higher rate taxpayer, you can currently save up to £624 per year if you sacrifice the maximum allowance. Both working parents can join a scheme to increase these savings (up to £933 per year for a basic rate taxpayer).

If your employer offers a Childcare Voucher scheme, join it. If not, ask them to provide one – it’s a win-win situation for the employer too, decreasing their employer National Insurance contributions for every working parent on the scheme and improving staff recruitment, retention and morale.

If you earn just over £50,000 a year, reducing your net income by taking Childcare Vouchers could also mean you avoid having to complete a self-assessment tax return. HMRC estimates that aroundhalf a million peoplewho previously didn’t have to complete a self-assessment form will have to do so as part of the changes to Child Benefit.

These changes are complicated and have been widely criticised as being unfair and unworkable. It is not based on combined household income, so two parents working and both earning just under £50,000 will keep all of their Child Benefit, whereas those with only one parent working and earning just over £50,000 will not. Also the new rules include an expectation that couples disclose to each other whether they claim Child Benefit, or earn above £50,000 a year, undermining the long-held principle of individual taxation.

Whatever your view, it makes sense to do what you can to maximise your benefits and maintain your household income as far as possible while the changes are in place.

John Woodward is CEO of the employee benefits company, Busy Bees Benefits. Busy Bees Benefits is part of the Busy Bees Group, the UK’s largest childcare provider with 214 nurseries nationwide. Busy Bees Benefits offers employee benefit schemes including Childcare Vouchers, Emergency Childcare, Retail Discounts, Will Writing, Cycle to Work, Car Care and services including Employment Law Support and Ticketing and Hospitality.

Busy Bees is currently campaigning to increase the cap on Childcare Vouchers, which has not changed since 2006. To support the “Mind the Gap – Raise the Cap” campaign, you can sign the e-petition.

This was posted in Bdaily's Members' News section by John Woodward .