What a dilemma! I’m the first to agree the benefits system is bloated, and that we’d do better tackling income inequality through an overhaul of the tax system – as opposed to politicians bribing us with our own money through welfare payments, tax perks, and other kickbacks.
On the other hand, you’re my dear readers, and many of you stand to lose your child benefit next year.
From January, the government will begin clawing back child benefit from any parent with an income of more than £50,000 a year.
A three-child family where one parent earns more than £60,000 is set to lose £2,449 a year – an enormous wodge of tax-free income.
One person’s child is another person’s tax bill
Now, we could debate the politics of welfare all day (let alone the ethics of having three children).
Supporters of universal child benefit argue that an income of £50,000 isn’t any great shakes, especially in the South East.
Buying a house with room for a kid or two is already a Herculean feat for anyone down here without a rich benefactor (a parent, a lottery win, a bank bonus, or a mortally-challenged grandparent). And do we really want a society where only the poor can afford to have kids?
I’d retort that London property prices are just as high for me – a parentless singleton – and yet I don’t get a handout from the public purse.
Moreover I see people wasting money all day long, especially middle class parents.
Slightly more tongue-in-cheek… I need to secure my financial future even more than a parent does, because there will be no spare bedroom in my daughter’s house in my wrinkly decrepitude.
So why should my taxes pay for someone else’s Bugaboo Lambskin Footmuff
In an over-crowded world I’m also sceptical of the argument that parents are bringing up future taxpayers on my behalf.
That’s the economics of a Ponzi scheme, and one ill-suited to a planet with limited resources.
You can keep your child benefits and retire richer
But enough! Let’s bury the hatchet, team!
Let’s concentrate on helping those Monevator-reading parents whose child benefit is set to go the way of sex, a good night’s sleep, and skinny jeans.
In this post I’ll explain how you can keep your child benefit and retire richer, too.
You’ll still have to cut back on your spending, admittedly.
But I’m pretty sure I could drive a lawnmower through the average £50,000-earner’s verdant budget, so I don’t think that should be an obstacle for most people who put their mind to it.
Besides, this strategy enables you to keep getting free money from the taxpayer – from the likes of me.
So if you’re still complaining, stop it and start saving instead.
How child benefit will be cut
Official letters explaining how child benefit will be withdrawn started going out this week (at great expense to all of us, I might add).
It’s estimated 1.2 million households will be affected by the changes.
The key to keeping your child benefit is to understand how this withdrawal will work.
Currently, child benefit is paid as:
- £20.30 a week for the first child
- £13.40 a week for additional children
So a two-child family for example receives:
£20.30 + £13.40 x 52 = £1,752 a year
But from January 7th, households where one or both parents individually have an income of more than £50,000 a year will start to see the benefit tapered down.
Note that some people (including a few journalists) seem to think that a combined household income of over £50,000 will trigger the tapering.
This is incorrect.
One of you needs to be earning more than £50,000. So if you are earning £30,000 and your partner earns £20,000, say, you’re not affected by the changes.
Child benefit will be clawed back as follows:
- For every £100 earned over the £50,000 threshold, 1% of the benefit will be taken back.
- You’ll still receive the benefit (unless you opt-out, though you should probably always claim it). But it will later be clawed back via a new extra income tax called the High Income Child Benefit charge.
- This will happen via your self-assessment tax return.
- At an income level of £60,000 and beyond, you’ll receive no benefit because it will have all been tapered away.
Note that ‘income’ here comprises money earned from all sources, including savings interest and dividend income, as well as any income from rental properties. Anything you’d declare to the taxman, basically.
It’s yet another reason to house all your investments in a tax-efficient ISA – because income generated within an ISA doesn’t count towards the £50,000 threshold.
Finally, as I understand it (as a non-parent) the child benefit is always paid to the mother. It should be clear from my notes that either parent can be hit by the High Income Child Benefit charge, though – which is bound to cause some unintended consequences, given the multiplicity of child-raising set-ups nowadays.
Losing child benefit is like paying a higher tax rate
A better way of looking at the withdrawal of child benefit is as a higher tax rate on a parent with an income of £50,000 or over, compared to those with incomes of less than the threshold.
Depending on how many children you have, if you’re over the threshold your marginal tax rate could increase to 50.5%, 57.5%, or even higher.
For example, someone on £60,000 with two children will pay an extra £1,349 in tax:
For one child, this creates a marginal rate of tax of 50.6% on the slice of income between £50,000 and £60,000. For two children, the marginal rate is 57.5%. It increases by about 7% for each subsequent child. For eight children, the marginal rate is 99%; for nine, the marginal rate is 106%.
Because the new charge is being introduced in January, there’ll only be a limited amount of damage done in the current tax year, which runs until April.
From April 2013 onwards though, all your child benefit will be fair game.
Use a pension to reduce your income
To keep all your child benefit, both parents need to earn less than £50,000.
If one or both of you is unfortunate enough to enjoy a higher income, here are a few things you can do about it:
- Split up with your higher-earning partner
- Tell your boss you will work for free from now on
- Tell your husband, wife, or whoever, that they can quit their high-paying job, in return for certain non-taxable favours
- Use big pension top-ups to bring down your taxable income
I’m guessing the final option – increasing your pension contributions – will be the most palatable for Monevator readers (though as I haven’t met your spouse, I could be wrong.)
Topping up your pension to reduce your income is a simple way to keep all your child benefit – provided you don’t earn too much or you’re sure you’ll die before you’re 55, and so be unable to ever spend it.
The maths is straightforward.
Let’s say you’re the sole earner in your house, and you make £55,000 a year.
Increasing your pension contributions by £5,000 a year will reduce your income to £50,000. You’ll therefore keep all your child benefit.
If yours is a two-income family and you both earn over £50,000, then you’ll both need to make the extra top-ups to take you both below the danger zone.
This is all legal, in case you’re wondering. (Recall the difference between tax evasion and avoidance).
And in my opinion, doing so is well worth it.
A higher-rate taxpayer with two kids who uses extra pension contributions to reduce his or her income enough to keep all their child benefit will be paying roughly 43.5p for every £1 that ends up in their pension1.
That’s a very nice return, even before you’ve invested a penny!
Still earning too much?
I do appreciate that child benefit is not designed for boosting the pensions of the middle classes.
As I said at the start, I’m just telling you how to do it, not passing moral judgement. I didn’t invent the Byzantine tax and welfare system, and if I did, it wouldn’t look like this.
More to the point, some people will earn too much for it to be practical to retain child benefit solely through higher pension payments.
My sympathy is limited the richer you are – as I said, I don’t like paying for mini-pashminas and pony lessons – but nevertheless, I’d suggest there may be other ways you can further bring down your income.
You might be able to sacrifice some salary in return for other company benefits or for childcare vouchers, for example.
It might even be possible to tilt your remuneration towards very long-term share options or similar, though you’ll need to do a lot of homework, and probably take professional advice.
If you earn more than £50,000 because you have savings or investments generating income outside of an ISA or pension (and you’re more confident in the stability of your relationship than I ever would be) then you might want to consider transferring some assets to your lower-paid partner. (Make sure doing so doesn’t take their total income over the £50,000 threshold, obviously).
Worst comes to worst, you could even send the big earner abroad, since high earners working overseas may be able to keep their full child benefit.
Important: None of this is tailored advice for your circumstances, and I’m not a tax adviser. Get professional advice if you’re unsure.
Living a £50,000 per year lifestyle
The elephant in the room, of course, is that you can’t spend your pension until you’re, well, a pensioner.
Though you’ll be quids-in eventually by paying more into your pension pot – thanks to the generosity of your fellow taxpayers – you’ll still need to earn enough income now to keep your little darlings alive enough to qualify for child benefit, as well as whatever else you consider an essential.
I’m afraid there’s nothing I can suggest here but to take a scythe to your budget. Only you can work out what’s dispensable for you and what’s non-negotiable.
As for the little cost centres, they could always get a paper-round…
Economics by Kafka
If you’ve ever wondered why the tax system is so vast and unfathomable, child benefit and this clumsy attempt to taper it down provides a perfect case study.
A silly system is being redressed with an even sillier system, at great expense and hassle for everyone – including HMRC – and despite the creation of huge inconsistencies.
It’s also a truly strange policy to see coming from a political party that sings the praises of old-fashioned families.
The jammiest couples who follow the strategy I’ve outlined will be working parents on say £55,000 a year each, who both do £5,000 in extra pension payments. They’ll keep all their child benefit despite having a household income of £110,000 a year, and they’ll have a nicer retirement.
In contrast, a sole earner in the South East on £60,000 who can’t afford to reduce his or her income by £10,000 because they’re shouldering a massive mortgage, commuting costs and all the rest, will lose all their child benefit.
Indeed, if you wanted to design a policy to encourage both parents to work full-time, you could do a lot worse. And that was probably not the idea.
Remember that the next time a politician talks about being “fair”.
Further reading:
- HMRC has been lumbered with an extra 500,000 self-assessment tax returns to process due to the High Income Child Benefit charge. No wonder it’s trying to head-off queries with a lot of information.
- Use its simple online checker tool to see if you’re affected by the changes.
- Here’s another tool, which enables you to estimate the High Income Child Benefit charge you’ll pay.
- MoneySavingExpert has created a very readable FAQ.
- I’m not a lone nutcase. It’s taken me all week to write this post (hence its going up late on Friday!) and as the week has gone on I’ve noticed several other sites advocating pension top-ups as a solution to these child benefit changes. Read widely, and see how the numbers work for you.
- Or even less if you take National Insurance into account [↩]
Great article!! Is this the case for VCT too?
Thanks
Child Benefit needs to be contained, but Osborne’s solution is complex and divisive. Much better to have restricted it to two children. What part of the phrase “tax simplification” don’t the government get?
I know this is a well beaten drum but I cannot believe that when the average salary is, what, £26-27k, we are subsidising those with at least one salary of £50k plus. Benefits should be a safety net and, in my opinion, someone on £50k has more than enough income to put in place their own safety net.
Guy
Can you contribute in to a Save As you Earn scheme and a Buy As You Earn Scheme where you buy the shares of the company you work for to bring down your total tax year income?
@pkora94 SAYE is post-tax and share incentive programmes (what you calle BAYE I imagine) are pre-tax but the amount you can buy is capped at about £1500 a year. Every little helps, but SAYE doesn’t help you at all. SIP also carries the risk of share price movements going against you, though the 42% tax uplift makes this a lot less risky than it otherwise would be
@TI I admire your courage in tackling this one. I bottled a post on this for fear of getting slaughtered. It escapes me totally why I should be subsidising people of twice the average household income to have children, and if I am, why this isn’t capped at two as SG advocated 😉
Completely agree with Guy here. As I read it, a couple earning 99k between them could potentially remain completely unaffected, while the rest of us fund the upkeep of Flossie’s polo pony.
Bear in mind this isn’t disability benefit we’re talking about, it’s child benefit. Child as in something you chose to have.
If people can’t take responsibility for what pops out of their own reproductive system, they shouldn’t be allowed one.
@Guy. The true average salary is much higher than £25k as that figure doesn’t account for people making money through investments or for contractors who can pay themselves at a lower rate and split income with family members (although that practice may even be illegal now, it still happens).
If you go to the Institute of Fiscal Studies website, you’ll find a calculator that shows you where you are, income-wise, relative to the rest of the population, but be warned, you’ll feel even poorer:
http://www.ifs.org.uk/wheredoyoufitin/
If you’ve got 3 kids and one earner, like my family, then it’s pretty depressing:
– An income of £50K puts you about the 45th percentile (i.e. just below average)
– An income of £60K puts you about the 55th percentile (i.e. just above average)
And yet, the government keep saying that this change will only affect the richest 15% of families. It won’t – it might affect the richest 15% of earners but that’s a very different thing.
Also, there’s scant information about how not claiming Child Benefit will impact the mothers state pension contributions or the ability to obtain a NI number for the child.
Should benefit like this be withdrawn from higher earners? Probably, but it ought to be fair. Also, where do you stop? Surely higher earners can contribute more to hospital treatment and school? The flip side of this approach is that you might say higher earners want a US style system, which benefits them and really shafts the poor. Seems like that’s where we’re blindly heading.
As a family man with two kids and a home maker wife earning approx 55k I think that this is a further shoddy deal.
Comparing my situation with two people earning 27k just makes me fume. They get two sets of personal tax allowances, are taxed at a lower rate and get child benefit.
And dont start telling me I am wealthy because i sure as hell dont feel it.
@Frugal — No, I don’t believe so. VCT income tax relief works via a reclaim on your self-assessment tax return, rather than by reducing your income. (You get given a special voucher when you subscribe for VCT shares for this purpose, although from memory I don’t think you need to use it unless requested by the tax man).
@pkora94 — I am going to defer to the venerable greybeard (okay the white Ermine) on that one. He knows those schemes far better than I.
@Ermine @All — Thanks for your thoughts. I am aware this is contentious and divisive issue, as we’ve already seen in these comments. I’ve tried to soften this a bit with a few comic asides in the post, which may well just annoy someone who feels they’re really getting a kick in the chops from the withdrawal of the benefit!
Regardless of whether you or I agree that someone earning over £60,000 should receive any child benefit from the public purse, I don’t doubt that losing £1,752 that you’d thought you’d receive – and perhaps even worked into your budgeting before you decided to have children – is a blow.
That’s around £3K of pre-tax income, equivalent to a 5% pay cut. Nasty.
@Bob — Just to let you know, you repeated ‘below average’ twice in your comment for both percentiles, so I’ve edited it accordingly (to now say “an income of £60K puts you about the 55th percentile (i.e. just above average)”)
Let me know if this wasn’t what you meant.
@JG
You may be missing the small fact that compared to your household they are losing twice as much lifetime to work. They work 80 hours per week to your 40, and they have to do that to make the same amount of money (OK slightly more due to the extra ~8k second tax allowance and the NI LEL). I think you will agree that their pay per hour is a lot lower, and quality of life accordingly lower 😉
That Epstein woman makes me want to spit. She should have spent some of her first child benefit on condoms and spared us her whining. According to the above calculator my net household income of£49,000 (3 adults) is more than 85% of the population so we are wealthy. Yet her household has more than double the income but she thinks she is entitled because she puts so much in. Yes you are entitled – to free education and free health and cleanish air and semi free roads. You are NOT entitled to pop out 3 children and expect people earning £10,000 to pay tax to support them.
Apposite!
But for me the strange thing about this Heath Robinson tax is why child benefit was not coupled with the existing Child Tax Credit system, which takes account of the family income – no additional admin would be required for families already receiving Tax Credit.
The answer must be that the Universal Tax system is going to include changes that are even more ridiculous than the Child Benefit changes.
Taken together with the pointless reduction of the higher tax rate from 50% to 45%, I have lost faith with the Conservative end of the Coalition. At least the LibDems introduced a sensible higher basic allowance.
@ermine
You make a fair point but it is sadly irrelevant in my opinion.
Lets assume the two people on 27k put their kids into nursery so they both have time to work. My wife works more than 40 hours a week taking care of the kids. So your argument that we deserve to be taxed more because we dont work hard doesnt hold water.
Or secondly assume i get to my 55k by doing 2 jobs and working 80 hours a week. Does my tax treatment change?
As I said this is a continuation of current government policy penalisingsingle earner families.
@JG though we’re probably starting to tread on dangerous ground I would say that the bottom line for me is that you both elected to have children. They will add joy and light to your life, things that are worth doing are usually associated with some sacrifices in other areas. I get to retire earlier than you probably, you get the rewards of seeing your line ocntinue.
When I asked myself the same question ‘do we want children’ some time ago economics weighed in and I came to the sad conclusion I couldn’t afford to do it and maintain the lifestyle I wished to keep, and so I am child-free. That probably was all to the good as that relationship failed since I am old-fashioned enough to believe that a child needs both parents but that’s a different story.
However, I paid about the same amount of tax as you did, without any compensation from the Government to help me pursue my other choices in life. Which is okay, I don’t actually expect other people to help me with my life choices. In return, I’d prefer not to do that for your good self, though I am not averse to assisting some people on lower incomes.
I agree with your more general point on apparent fairness, that it should be a household income of 50k that is targeted rather than an individual’s income. I never understood why I was assisting my work colleagues to have children through universal child benefit, and I don’t understand why I am assisting you. The policy doesn’t penalise single earner families, what it does is unfairly favour double earner families, and that is the anomaly I hope to see addressed one day.
FWIW you earn more than twice the average UK household income. I’m not against assisting some families to have up to two children, but I am against assisting those who have an above average household income. Those two people you cited working 80 hours a week between them are paying for your family to be able to choose to have one earner. They don’t have that choice. Perhaps that makes things clearer 😉
@ermine
I think we are saying the same thing.
I would gladly give up all universal benefits for a bit of fairness for single earner families and if you look at the combination of withdrawn benefits plus extra taxes my marginal tax rate is incredible which is basically the point of this article.
Anyway have yourself a nice day and you should try the kids they are great.
@JG It’s part of the human condition to be more sensitive to percieved unfairness towards oneself. In your case the two earners ‘twixt household income of £50k to £100k, and in my case between myself and and the well-off with children.
I was actually reasonably happy with my lot having gotten used to sponsoring my colleagues’ kids via the tax system. However, it’s just as unjust as your case is vis-a-vis the dual income households but in a different way.
What is making me, and a lot of others by the looks of it, spit bricks is the grouching from those that have benefited from an injustice of the tax system but no longer doing so, pointing fingers at others who continue to benefit from the injustice because the tax system is too dumb to fix that too at this stage. It ain’t pretty. Gore Vidal had an insight into that sort of thinking when he said it is not enough to win. Others must fail I am sure the taxman will be coming for the £50k + £50k people in future, probably when Universal Credit is brought in.
Some of the current issues are inherent in the deep injustices of being taxed individually but getting benefits assessed as a household. In the past people were taxed by household, and perhaps the Tories returning to a taxation by household in terms of a married couples’ tax allowance or at least permitting tax allowances to be pooled would address this. You would lose CTB but would gain about the same from having a 16K tax allowance. You would probably think this unfair in that SINKY couples would also benefit but they are rarer in modern society.
In the interim you might care to open a SIPP to retain your CTB entitlement and use some of my taxes to improve your income in old age. 😉
@ermine
Advice gratefully accepted and I hope you have a comfortable retirement as my kids are paying your ‘pay as you go’ state pension – assuming there still is one of course!
> my kids are paying your ‘pay as you go’ state pension
aha, that hoary old chestnut, eh? You kindly had kids for the good of society 😉
I am over 50, but I would be extremely surprised if the State Pension were available to me, because I expect it to be means tested and denied, despite my 30 years of NI stamps. I observe the 16k savings limit of Universal Credit, and accept that life isn’t fair and s**t happens sometimes. I see which way the wind is blowing, and it’s away from universal benefits. Your CB conundrum is one of the straws in the wind.
I believe in taking responsibility for my life decisions, so I can live with the loss. These things happen. The SP is not a huge part of my retirement planning. Never rely on Government benefits for your lifestyle. Oh and as for the chestnut about your kids and my (and more to the point your state pension? If your kids have any brains they’ll have left Blighty by then, seeking their fortunes in the new worlds of Asia. And good luck to them, I say.
The child benefit wheeze was the final straw for me. Not that I couldn’t see their point, but the ham fisted manner in which the idiots Cameron and Osbourne attempted to deploy it wound me up.
I decided I would never pay higher rate tax again and for the last two years I haven’t – 33-35K a year gross into my pension – f*ck ’em. Investments in ISA, capital gains instead of dividends etc.
I’m obviously going to draw some ire from the raging socialists (except I’m more left wing than most of them, all benefits should be means tested!)
I also overtly doing what most of the civil service/MP’s etc are covertly doing. For instance if the rules round pensions were to change then all state employees would have to have their gold plated pensions properly valued, none of them from nurses up would qualify for child benefit if it ever happened (so I’m safe enough). Most people in government employ are unaware of the stonking deal they get (and the value it would attract…)
@JayGee, like many single income earners what you’ve conveniently forgotten is that your partner pays a nice 0% tax rate on the 40 hours of work a week she does.
If the two of you weren’t married and instead you were employing her to do those 40 hours of childcare, housework etc. then not only would you be paying VAT on that but she’d be paying NI/income tax etc. Chances are the tax you save is so great that without it you wouldn’t actually be able to afford to employ her to do the work in the first place!
I don’t begrudge single earner couples their enormous tax saving but I do begrudge them then whinging about how tough their lot is!
@Andrew. That’s right, it’s much better for their child’s health if his partner goes to work, but gets an allowance to fund someone else raising their children. Evidence does indeed suggest that kids raised by others are much better adjusted with a lower burden on the state in future…oh wait.
Also, with the “children is a choice” argument, surely childbirth should also be private (non NHS)? And while we’re at it, why should I may for the health treatment of overweight people, smokers, ex smokers, drivers involved in RTA’S (their choice to drive).
Don’t you all see that the divide and rule politics of the condems is pitching the poor against the slightly less poor? At this rate, the uk will look like a republican USA with shitty weather. Somehow we’re forgetting that we wanted a better society.
Btw, if this is really about reducing debt, go after tax evasion and extreme tax avoidance.
@Bob. I think you’re trying to misinterpret me on purpose there/set up a straw man.
My point isn’t about the rights and wrongs of choosing to work or stay at home to look after the kids. I was pointing out a failure to understand the economics of the situation. You obviously missed the bit in my previous post where I said I didn’t begrudge people who worked at home being untaxed. I just begrudge the Daily Mail style victim mentality of always seeing the worst in your situation and the best in everyone elses.
I fear it’s now too late since your reply but I’d also be interested in the research/evidence which you imply shows that child whose parents use childcare are “less well adjusted” or a “burden on the state”. The research I’ve seen tends to imply that when you control for parental wealth, education, socio-economic group etc. that there is no clear cut answer to whether using childcare changes life outcomes. I think there is even some research that suggests that high quality childcare can benefit children at certain stages of their development.
Can someone help with a more technical question? It is best illustrated with an example.
Say I earn £60k via self employment and want to retain my child benefit (my partner is below the threshold). If I pay £10k into my SIPP will that reduce my income enough? The reason I ask is, as I understand it: I pay £10k of my self-employment income (i.e. untaxed money… at the moment) into my SIPP for this tax year, that makes the balance of my SIPP £12K (The SIPP provider claims a tax refund at the basic rate (20%) on behalf of the customer). As I am a higher rate tax payer I then have to reclaim the additional tax refund (~2K) via my tax return. What happens next, is it:
1) this 2K comes back to me and counts as earnings (i.e. increasing my salary to 52K – hence loosing some child benefit) or
2) do they reduce the tax I pay (keeping my income £50k and SIPP balance £12k but with a lower income tax bill) or
3) do HMRC somehow pay it into my SIPP (hence keeping my earnings at £50k and my SIPP balance at ~£14k)?
This may be really obvious, but any help would be greatly appreciated.
@DJ try https://www.gov.uk/child-benefit-tax-calculator/main
@rhinestone Thanks for the link, that is really useful.
Yes, i think the end result is similar – paying £4,000 into your pension from your net income becomes £5,000 with the tax relief top-up. And your basic rate band (where you pay tax at 20%) is expanded by £5,000, which covers your bonus.
kind regards
Abri