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Tax perks for parents' paying into their child's pension

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By working with the taxman, you could boost your child’s pension pot. That is thanks to the tax perks that are available by paying into your child’s pension – even after they have left home and have a job and pension of their own – as a so-called stakeholder contributor.

The tax breaks

The intricacies of tax rules and regulations are nothing if not complicated, so the tricks to making the system work to the benefit of you and your child may not be immediately apparent.

In an article dated the 5th of June, however, the money pages of the Daily Mail newspaper revealed the extent of tax breaks available and the value of contributing your own funds to your child’s pension pot – effectively, a free gift for which they are likely to be eternally grateful.

How it works

Contributions to pension schemes come with an annual tax allowance – with a ceiling that is currently set at £40,000, so that you only pay tax on contributions above that amount.

What many people might not realise, though, is that if you are paying in those contributions to your child’s pension pot, your payments also attract the same tax relief. The annual allowance applies to the sum of contributions to all the individual’s pension schemes, although if the allowance for one year has not been completely used up, any remaining balances from the previous three years may be carried over into the next.

If you and your spouse each have salaries of less than £50,000 a year your contributions to a child’s pension pot enjoy tax relief at the basic rate – currently 20%. If your child is paying the basic rate of tax, the 20% allowance applies, but if they are earning more and pay tax at the higher rate, a 40% allowance on pension contributions applies (although you must apply to HM Revenue & Customs to reclaim the additional 20% above the basic rate).

Child benefit and Inheritance Tax

Contributions you make to your child’s pension scheme also effectively reduce the level of income that is taken into account when assessing your eligibility for child benefit payments.

As your salary moves above £50,000 a year towards £60,000, for instance, the assessment gradually reduces the amount of child benefit to which you are entitled.

But any pension contributions you are paying into a child’s pension scheme are deducted from the assessment of your annual income – if you contributed, say, £8,000 a year, for example, that becomes £10,000 once the tax allowance is taken into account and with the £10,000 deducted from a £60,000 annual income, you may once again qualify for receipt of child benefit payments.

Transferring some of your wealth into your child’s pension scheme in this way might also help reduce your liability for Inheritance Tax when you die.

Taking advantage of the tax perk

Insurers Royal London have lent their support to raising awareness of the tax advantages in parental contributions to their child’s pension pot.

Many parents are likely to have a greater disposable income than their child, so may pass on the tax break for the latter’s benefit – every £800 you contribute to the child’s pension pot increases to an effective £1,000 once the tax perk has been taken into account.

This data is correct as at the time of writing. 

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