Higher tax threshold - child benefit

Hofmeister

Hi all,
quick question if someone can help, it would be appreciated.
I am going to earn this year £33894.
I have a company car, and my tax code is 234L (private health also).
One of my previous employer's went bump, and basically so did the pension scheme. After 10 years of legal stuff, the pension is sorted, and i have been offered 2 options, a one of lump payment to settle my pension of £5400, or they can transfer into a legal and gen fund where it is worth £120 per annum when i get to 65 (+ 2.5% year on year), it was originally worth 1120 per year lol :mad:
My question is, if i take the lump sum, i will then be pushed into the 40% tax bracket as my earnings become 33894 +5400 (35000 + 2340 is what i believe to be limit ) , fine no problem fair enough. However, would this then potentially affect our child benefit for the following year? We have 3 kids, wife works p/t earning circa 3k per year, so the CB helps us a lot? Would i be affected is the question, as i am going to be self assessed by the fact i have an additional income this year albeit a one off (the 5.4K offer, which is being taxed at 20% so i know i am going to owe some dosh to the tx man). Hope this all makes sense?

ceeforcat

1) Lump sums pension payments are generally tax free. One also needs to establish if this payment is compensation for loss of pension rights which, generally, would also be tax free. The 20% deduction is a bit of a mystery.

2) The child benefit rules are currently being 'looked at' by the government - expect the budget will reveal all.

Hofmeister

Thanks ceeforcat, but the letter states the 5.4k is treated as income, and i will have a P45 sent with it, Also they have stated that they will take off the 20% (by all accounts, the first 25% is tax free, the rest is liable).

tyllwyd

I'm just guessing - but if you take the lump sum now (before April 2012), that makes you a higher rate tax payer in this tax year (2011/12). But in the 2012/13 tax year you will be a basic rate tax payer, so if the change is made in January 2013, it won't affect you.

If the bonus comes after April 2012, I guess you would be a higher rate tax payer in that year, so you would be caught by the change. But it would be logical that it would only affect you in that tax year, and not after April 2013.

But looking at your figures again, are you certain that you will be a higher rate tax payer even with the bonus? I'm not at all sure you will be.

Hofmeister

Hi Tyllwd, i think i will be as i have a company car, therefore my tax free allowance is reduced, hence my tax code being 234L. How i understand it is, i can earn 2340 no tax, then 35k 20% tax, then the rest is 40%. My 40 % threshold will be £37340, i will earn 2k over this when i get the lump sum pension payment.

ceeforcat

Do you earn £33894 before or after pension contributions on your current job? If before, what pension contributions do you pay?

thenudeone

My guess on the child benefit situation is that the government will use 2011/12 tax year position (which will have to be submitted/finalised by 31/01/2013) to determine if child benefit is payable from April 2013.
Trying to use current year information (or even previous year information) on a live basis would be almost impossible and I would expect they would want to avoid the publicity from giving child benefit (usually to the mother) then having to take it back when her husband/partner submits his tax return (and they find out he's a higher rate taxpayer) 22 months later. They would probably build in safeguards so that if income dropped substantially it could be reviewed.

That's how I am planning my tax affairs, anyway.

tyllwyd

thenudeone wrote: »

...Trying to use current year information (or even previous year information) on a live basis would be almost impossible and I would expect they would want to avoid the publicity from giving child benefit (usually to the mother) then having to take it back when her husband/partner submits his tax return (and they find out he's a higher rate taxpayer) 22 months later. They would probably build in safeguards so that if income dropped substantially it could be reviewed. ....

I thought that child benefit was being clawed back through the higher rate tax payer's tax bill, so it would be paid out through the year, but when the higher rate tax payer submitted their tax return, the bill would be bumped up by the amount of child benefit paid out. So they wouldn't be asking for the person who received the child benefit to pay it back, it would just be part of the tax bill. I]Edited[/I] [I]to say - I was just googling to check if that was right and I can't find any definite information on how it might work, so I may well be wrong![/I Thinking about it though, maybe you are right and I'm wrong about the tax year it would apply to - I wonder what would happen if a PAYE employee become a higher rate tax payer part way through the year - would you have to repay the whole year's child benefit or just pro rata ... it gets more complicated the more you think about it.

But considering that the change is due to come in next year, it seems crazy that we don't know for sure! Whichever way, taking the money as cash doesn't seem like a great option, because so much of it will be lost in tax.

Hofmeister

Thanks all for the comments, the 33894 is after salary sacrifice contributions.
Reference how much i will lose in tax, how i worked it out is i will lose cira 1300 in tax. The pension will only pay me 120 per annum. So i take 4k net now, or 120 per annum in 30 years time.........its a no brainer for me until you look at the potential implications.

Savvy_Sue

thenudeone wrote: »

Trying to use current year information (or even previous year information) on a live basis would be almost impossible

There's a plan for employers to start having to submit information monthly to HMRC rather than annually wef 2013. That may be part of the plan?

tyllwyd

About the lump sum - maybe the next step is to find out more about the fund it will be invested in, and whether you have any other options about where it is invested. If you know more detail about the fund they are suggesting, you could ask on the savings and investments board whether they reckon it is any good.