In Focus: Tax  

Advisers must remind parents of tax benefits

Advisers must remind parents of tax benefits
Photo by Emma Bauso via Pexels

Advisers have been urged to help their clients who are parents to look more closely at whether they qualify for child benefit payments. 

Analysis from Quilter has found too many higher-rate taxpayers do not realise they could gain £18,500 on child benefit payments and leave themselves £120,000 better off in retirement

According to the company's calculations, based on a pension pot of £100,000 and a contribution of £100 a month for a breadwinner aged 40, families that have two young children, with one parent earning £59,000, could increase their pension contributions by £467 a month.

This would enable them to claim back over £18,500 over the 12-year period that their children are eligible for child benefit payments.

Due to the additional tax relief on pension contributions for higher-rate tax payers and the extra child benefit payments, this would mean that it would cost someone just over £35,000 in total over 12 years to gain just under £49,000 from these two tax benefits.

Ian Browne, pensions specialist for Quilter, said the long-term result would be to increase their pension pot by over £122,000 at age 65, assuming a modest growth of 2 per cent after charges and inflation.

How it works:

  • A family with one child can claim up to £1,094 a year in child benefit and nearly £1,800 a year if they have two children.
  • However, if one earner in a family makes more than £50,000 a year, they must pay back 1 per cent of the Child Benefit they receive for every £100 over the threshold.
  • But the High Income Child Benefit Cap (HICB) is on income after pension contributions, so if someone pays more into their pension they can fall below or closer to the threshold, thus increasing the amount of Child Benefit they receive while also taking advantage of the tax relief on pension contributions.
  • The HIBC was introduced in January 2013 and has significantly reduced the number of families in receipt of Child Benefit.
  • As at the 31st August 2019, there were approximately 7.28m families claiming Child Benefit which is down from 44,000 families from a year earlier.

Browne said: “The Child Benefit system is incredibly complicated and wage inflation has gradually pushed more people over the HICB each year.

"At the most recent budget, the higher-rate tax threshold has been frozen at £50,270 but the HICB Threshold of £50,000 has not changed, with it meaning basic-rate taxpayers will get caught for the first time.

“However, parents often don’t realise that they can receive much more in Child Benefit payments by upping their pension contributions while also setting themselves up for a more prosperous retirement and taking advantage of the favourable tax relief available."

He said while this means a client would have to increase how much they are saving for retirement, the benefits mean the ultimate gain far outstrips the spend.

Browne added: “There is still a significant proportion of people in the UK who are not saving enough for retirement and using this quirk in system could help them achieve their retirement aspirations.

"Everyone’s financial circumstances are different and seeking professional financial advice is always best to ensure that your whole financial life is accounted for.”