Are you a parent earning £50 - £60,000 ? If so you will be caught in the child benefit trap which demands you pay a High Income Child Benefit Charge on the child benefit you receive. This is not a reduction in child benefit but a tax and furthermore you'll need to complete a self assessment tax return in order to declare and pay the High Income Child Benefit Charge.... don't panic help is at hand.
Child Benefit has until recently been a universal benefit. given to everyone regardless of personal income. For the first child the payment is £20.50 per week and £13.50 for each additional child. Since January 2013 this changed with the government announcement that if you were a parent with income over £50,000 per annum, you would be required to either forgo child benefit or pay the High Income Child Benefit Charge. Joint income is irrelevant, there could arguable be a joint household income of £98,000 but if one parent earns over £50,000 per annum then they have to pay the charge which is a tax and furthermore you will need to fill out a self assessment form to declare and pay it.
Be aware too, that £50,000 is not just employed income it relates all sources of income added together. So add savings income, rental income, pensions income, dividend income.
So how does the High Income Child Benefit Charge Work ?
1% of Child Benefit is subject to the charge for every £100 or part thereof of income above £50,000.
This is not a reduction in Child Benefit but a tax charge for which you will need to complete a self assessment form.
Lets do the Maths.
A parent of three children under the age of 16 with an income of £54,000 will receive £2,477.80 per annum.
Their income is £4,000 above the threshold or 40 x £100 giving rise to a 40% tax charge on the child benefit.
A tax charge of £991.12
Lets make a pension contribution.
A contribution of £4,000 will bring income down to the threshold and receive tax relief.
Tax relief at source with the pension provider @20% = £800
Further tax relief as a higher rate tax payer 20% 800
Saving on not paying the High Income Child Benefit Charge 991
Total relief on pension contribution 2591
2591 / 4000 x 100% = an effective rate of tax relief of £64.78 %
Plus an enhanced income in retirement and potentially simpler than completion of a self assessment form.
You could also ask your employer to undertake a salary sacrifice exercise, reducing your salary to within the threshold making a pension contribution on your behalf and reducing their National Insurance Contributions in the process. You could also in an extreme move and situation permitting, set up a limited company and pay yourself whatever it takes to keep the child benefit. More charitable solutions would be to voluntarily give up your child benefit to help save the nations welfare bill or make a Gift Aid donation to reduce income.
If you are effected by the High Income Child Benefit Charge get in contact to discuss some solutions.
The several inches of snow that fell after Christmas, were just what the children wanted, "now its really winter", said my son. After tiring themselves out sledging, they turned their creative talents to making a snowman, just like the one from the film Frozen. As the snow fell, the word "Frozen" gave me inspiration for my latest, perhaps seasonal blog.
Just what does the term Frozen mean when mentioned in the same sentence as pensions.
You most often hear the phrase, Frozen Pension, applied to pensions that are left behind with an employer after ceasing employment. The state pension can also be frozen, depending on where in the world you decide to retire. The Pensions Regulator can also issue a pensions freezing order where they feel a scheme needs investigating. This can be where malpractice is suspected or more commonly, where an employer has got into financial difficulties and the members benefits within the pension scheme need protecting.
There are two main types of occupational schemes, those that provide defined benefits at a set retirement age based on salary and years of service and those that provide uncertain benefits at retirement based on the level of monetary contributions, the investment growth on the contributions. The later are often referred to as money purchase schemes but the benefits can still grow dependant upon the underlying investment but its worth checking on the type of investments and their performance.
So is it helpful to use the term Frozen when talking about occupational pension schemes? It implies a lack of movement, a lack of growth and this is not necessarily the reality. It could be that the only frozen factor is the salary at the time of leaving. There could be some valuable guarantees in place for future pension benefits and the pension scheme rules may dictate that benefits have to be revalued each year to keep pace with inflation. In the case of local authority schemes it may be possible to return to employment, pick up contributions and build upon the years of service already earned. Instead of referring to frozen pensions would it be more helpful to use the term Deferred Benefits?
From where I'm sitting, the biggest pensions freeze is the lack of engagement I see in people when it comes to pensions and planning a retirement income. This is hardly surprising given the overly complex way benefit statements are provided. Some employers do help but the majority do not meet with member's of their pension scheme to explain how their pension benefits are accumulating, relying instead, on the information dump contained in an A4 envelope.
Combined with their free lunch attitude to charges and commissions, the situation is perhaps more exasperating when it comes to pensions historically provided by banks and insurance companies. The annual benefit statements might as well be written in a foreign script. They have limited appeal for anyone who's first language is common sense. Those annual benefit statements just end up destined for the drawer or shredded.
As we approach the new world of pension freedoms in the UK, it's going to be vital to understand your pension benefits; what you have, why you have them, whether they are going to provide enough, what the underlying investment performance is, how this fits in with your plans, what charges you are paying and to whom, whether you are claiming all the tax relief you can.
The world of pensions is changing fast, please don't apply your own freeze on pensions. To echo my son's words in the opening paragraph, don't let your retirement be like a real winter. We are here to help you trace old pension schemes, understand what you have and work with you to build your future wealth.
Whilst reading the blog articles please be aware of the following:
Welcome to the blog curated by Jill Turner. The pages are not intended to give advice, they are just the real life stories from a real life financial planner and the wonderful people I get to meet.
I want the pages to be engaging, informative and purposeful.
The information contained within this blog is based on our understanding of current government proposals and tax
law, both are liable to change in the future.
Jill Turner is a member of the Personal Financial Society