Tax advice of the week: Top up your pension pot
Apr 05, 2012
The child benefit charge comes in during the 2012/13 tax year. It will only apply to child benefit claimed during the final quarter (7/1/13 to 5/4/13), but it is worth preparing to try to avoid it, says Nick Braun in Business Tax Saver.
Child benefit is “worth £1,056 a year for the first child, plus £697 for each subsequent child. The charge is levied at 1% of the child benefit for every £100 by which the highest earner’s ‘adjusted net income’ exceeds £51,000.”
A simple measure is to make pension contributions. Say Alan earns £55,000 in 2013/4 and his wife, who earns £30,000, claims £2,449 child benefit for three children. On Alan’s top £5,000 of income, he will pay £2,100 income tax and NI (42%) and a child benefit charge of £1,225 (50%), leaving him with just £1,675.
If he instead put £4,000 into a pension, the taxman will add £1,000 of basic tax relief, bringing his gross contribution to £5,000. Alan can also claim back higher-rate tax relief on top, and because his adjusted net income is now £50,000, he escapes from the child benefit charge.
In effect, “he ends up with £5,000 in his pension pot instead of £1,675 in after-tax income”.