Child Benefit – avoiding the High-Income Child Benefit Charge
The 2022/23 tax year is coming to an end and you may be left wondering if you have made the most of your tax-free exemptions and allowances. If you or your partner receive Child Benefit but earn over £50,000 a year, you are liable to pay the High-Income Child Benefit Charge (HICBC).
The HICBC is only applicable to you (or your partner) if one of you has an income over £50,000 per year – meaning that if you both earn less than this then neither of you will be liable to pay anything back. This is due to the cap being based on the highest earner’s salary and not the household income.
Invest in your future
Increasing your pension contributions to reduce your tax liability now will benefit you in retirement. You will not only save on HICBC, but you might even be able to lower your tax rate depending on the amount you contribute into your pension.
If you, or your partner earn over £60,000 per year then you will not qualify to receive any child benefit.
What can you do to avoid having to pay HICBC to HMRC?
The most beneficial way to reduce your liability is to increase your pension contribution. This will mean less take-home pay, so you would need to make sure this is affordable for you. The HICBC calculations are made after pension contributions are deducted, known as an adjusted net income.
For example: Your total income for the year is £60,000. If the total you pay into pensions – whether workplace or private – is £10,000, your net adjusted income falls to £50,000. This means the High-Income Child Benefit Tax Charge would not apply. For families with two children, the total saving would be £1,885.
What’s more, as you pay higher tax on earnings above £50,270, you would get 40 per cent relief on most of your pension payments, meaning the effective tax saving is almost 60 per cent.
The Financial Conduct Authority does not regulate tax advice.
Tax treatment varies according to individual circumstances and is subject to change.
The information provided is based on our current understanding of the relevant legislation and regulations at the time of writing and may be subject to changes in legislation or practice. Also, it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.