Regulation  

Avoid child benefit cuts by boosting pension contributions

One in six higher rate taxpayers are expecting to have their child benefit payments reduced due to new tax rules and of those taxpayers, 25 per cent may boost their pension contributions to mitigate this, new research by Prudential has revealed.

Matthew Stephens, Prudential’s tax expert, claimed that there is a “strong case” for a parent whose income is between £50,000 and £60,000 to make additional pension savings to avoid the new tax.

From 7 January 2013, parents will have to pay the new child benefit tax if one parent in a household earns more than £50,000. This is regardless of which parent is claiming the benefit and does not take into account income earned by the second parent.

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Currently in the UK, a payment of just over £1,000 is given to families on child benefits to the eldest child. A further £696.80 is paid a year for each additional child. Therefore a high-earning family with three children under 16 could find themselves with just under £2,500 a year worse off under the new rules.

Mr Stephens said: “The new child benefit tax charge will be a real blow for many families next year, particularly in households where salaries are unevenly distributed and one parent is the main or sole breadwinner.

“There is, however, a strong case for a parent whose income is between £50,000 and £60,000 to make additional pension savings to avoid the new tax, and at the same time boost their retirement income.

“Saving for retirement is absolutely vital, yet a quarter of higher rate taxpayers say they don’t contribute anything at all to a pension scheme, which is very worrying. Often this is because people believe they can’t afford to save, but as is the case for many families that will see their child benefit payments taxed from next year, not saving for retirement could be a far more costly option.”