How your pension pot can help claw back lost child benefit
What is the connection between your pension contributions and child benefit payments you may receive? Rather more than you might think, thanks largely to the mysterious ways in which the British tax system works.
High Income Child Benefit Tax Charge
Ever since changes to the tax system that were made in 2013, your qualification for child benefit has been subject to a so-called Child Benefit Tax Charge.
What this means is, if your income exceeds £50,000 and you or your spouse or partner are in receipt of child benefit, you may have to pay extra income tax. If your spouse or partner is also earning more than £50,000, it is the individual on the higher earnings that is responsible for paying the tax.
The rate of that additional element of tax is such that once you are earning more than £60,000, the extra tax you must pay is so much that it effectively cancels out the whole of any child benefit you get.
The alternative to paying extra tax, the government website helpfully explains, is simply to stop receiving child benefit.
Enhance your pension pot
What the official explanation of the Child Benefit Tax Charge does not go on to make clear, however, is that by enhancing your pension pot, through increased contributions, you not only get the advantage of a fuller pension but also stand to claw back some of those “lost” child benefit receipts.
An article in the Guardian newspaper on the 9th of September 2017 of September 2017, helps to explain how this might work – and makes the point that many higher-earning families may be unnecessarily missing out on child benefits.
At the nub of the solution are two facts – which are generally not that well known:
- the assessment of your Child Benefit Tax Charge is based on what the inland revenue calls your “adjusted net income” – your total taxable income (your basic salary, bonuses and any benefits), minus tax deductible payments (such as gift-aided charitable donations and pensions contributions); and
- you qualify for tax relief on pension contributions up to 100% of your salary.
By increasing the amount you are putting into your pension pot, therefore, you may effectively reduce your adjusted net income, bringing it below the £50,000 threshold at which the Child Benefit Tax Charge is imposed.
Increasing the amount in your pension pot in this way clearly has long-term benefits in terms of the size of the pension you eventually enjoy, but also has the additional benefit of helping you claw back the child benefit receipts you might otherwise have given up.
Reducing your adjusted net income by increasing your pension contributions is an entirely acceptable way of clawing back those lost child benefits and is a solution suggested, for example, by the Citizens’ Advice Bureau.
Whilst ordering your affairs to make the most of any child benefit to which you are entitled, therefore, you might want to conduct a thorough review of all of your pension arrangements.