£50,000 – keep child benefit.
An estimated 1m families could lose out on their child benefit payments this year. Child benefit is reclaimed by a tax charge where at least one parent has income in excess of £50,000.
A family with two children could see its annual spendable income drop by up to £1752 a year in 2013/2014; those with three children could lose £2449 a year. At a time when prices are rising faster than incomes, it will be critical for many families to know how they will be affected, and what options they may have to improve their situation.
The benefit is clawed back by way of a tax charge on the household’s highest earner if their personal taxable income exceeds £50,000 in the tax year. Payments will continue to be paid in full and could well have been spent before the charge arises.
But this test is not based on ‘income’ as most people think of it. It is based on ‘adjusted net income’. This is the client’s total taxable income from all sources, less certain deductions, such as personal pension contributions.
So clients can flex the rules, and retain their child benefit. Making a pension contribution can reduce the income for the purpose of the means test to below £50,000. This would remove the child benefit tax charge altogether. And higher-rate tax relief would also be available on the contribution if it all falls in the higher rate band.
■ £100,000 – retain personal allowances.
A pension contribution can restore the personal allowance for those with income in excess of £100,000. For the current tax year, personal allowance will be lost completely once adjusted net income exceeds £116,210. For a higher-rate taxpayer, the effective rate of tax relief on a pension contribution to restore the personal allowance can be as high as 60 per cent.
■ Salary sacrifice.
Salary or bonus sacrifice is equally effective in reducing income to retain child benefit or personal allowances. March and April is traditionally the time when companies pay out bonuses. A bonus is often the final piece of the remuneration jigsaw. Receiving an unexpected or higher than anticipated bonus can often lead to income breaching these important thresholds and offers little time to react to retain personal allowances or child benefit.
Giving up salary or bonus in this way has the added benefit of saving national insurance as the employer contribution made on the employee’s behalf is paid before deductions. Some generous employers may even throw in the company’s NI savings too.
■ £150,000 – last chance for 50 per cent tax relief.
From 6 April the top rate of tax will fall to 45 per cent. Making a pension contribution before the end of the tax year is the last opportunity to get 50 per cent tax relief. In addition, the reduction in the pension annual allowance from £50,000 to £40,000 comes into play from the end of the 2013/2014 tax year. This gives further impetus to maximise contributions using carry-forward before the cuts to the relief and contribution limits take effect.
■ Drawdown income limits.
Other changes that have already taken place are notable. Changes to the drawdown income limits were introduced from 26 March. The move back to a 120 per cent drawdown limit is a welcome response to changed financial conditions. It will make a real difference to drawdown users hit by the perfect storm of low gilt yields and volatile markets.
Dave Downie is technical manager of Standard Life
