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Boost pension & claw back child benefit

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 Natalie Wright Mazars blogger for MMB Magazine Natalie Wright, Chartered Financial Planner

 Boost your pension savings AND claw back child benefit

Do you know that putting more money into your pension could reduce your overall income tax and retain your child benefit payments?

One of my previous articles outlined the child benefit rules and how it is reduced for those earning more than £50,000 each year and ultimately completely withdrawn once earnings reach £60,000 – please see details here Child Benefits Article Are You Missing Out

The £50,000 income level for assessing your entitlement to child benefit is not as simple as looking at your annual salary. The child benefit tax charge is based on your adjusted net income; this is essentially your total taxable income (i.e. basic salary plus any benefits from your job such as a company car, private medical insurance, as well as dividend income, rental income, etc), minus payments such as pension contributions and gift aided donations to charity.

Any pension contributions that you make (either to an occupational scheme or a personal pension) will reduce the final amount of your adjusted net income. For a family, where one parent has income in excess of £50,000, putting money into a pension is already a very attractive option (as they should benefit from additional tax relief being a higher rate taxpayer), but when you take into account the additional advantage of reducing the higher income tax charge and retaining child benefit, this makes pension contributions even more attractive.  

Example: Sarah and Sam are married with two children, Sarah has taxable income of £55,000 and Sam has taxable income of £40,000. They have been receiving child benefit totaling £1,788.80 each year. As Sarah’s income is £5,000 over the threshold she faces a tax charge of 50% of £1,788.80 – i.e. £894.40. That means the overall value of their child benefit has been reduced to £894.40.

If however Sarah was to pay £4,000 net into a personal pension over the year, this will be “grossed up” to £5,000 (20% basic rate tax is added to her net contribution). This amount then reduces her total net adjusted income to £50,000 – this means Sarah and Sam retain the full child benefit of £1,788.80.

In addition, as Sarah is a higher rate taxpayer, she should also be able to claim an additional £1,000 in tax relief (20% of £5,000) through her self-assessment tax return. This means that Sarah has had to pay out £3,000 personally and in return, she has received a payment into her pension of £5,000 and retained the full child benefit payments of £1,788.80 (£3,000 cost v £6,788.80 total benefits). 

Mazars Financial Planning Ltd

@NWright_CFP

This information is correct as at 16/10/17.

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