Child tax credits + child benefit going.

nervousfrog

Hi,

It's my first post here so please be gentle.

I have been trying to work out how the upcoming changes in CB are going to affect my family. If my maths are correct I just can't believe what I am seeing. I hope someone can spot an error in my maths?

A bit of family back ground first we have 5 children two of them are disabled. She currently receives some child tax credit due to the two disabled children.

I have been trying to workout the impact of additional earnings from my variable annual bonus and overtime claims to our household income.

This is what I have come up with.

Tax credits Calculation

Withdrawal rate for tax credits 41% or £410 for every £1,000 of income above £15,860.

Current child benefit for 5 children £3,800

Withdrawal rate for child benefit at 10% for every £1000 pounds over £50k which works out at £380

Tax and benefit lost on earnings over £40k per £1000

£420 income tax
£410 Tax Credits

House hold income + £170 per £1000 earned.

Tax an benefit lost on earnings over £50k per £1000

£420 income tax
£410 Tax Credits
£380 in child benefit

House hold income - £210 per £1000 earned.

Does this add up?

Regards,

Rob.

gingergee

Think you'd get more advice if you re-phrased all that. and included how much you earned etc. Its mashed my head reading it!!! lol, someone will help soon xx

SkyeKnight

It does make sense to me and looks right - and yes, it is possible (though unusual) to get less money the more you earn between £50k and £60k as the withdrawal of Child Benefit takes no account of the withdrawal of Tax Credits or deductions for tax/NI.

If you aren't much over the threshold it would certainly be worth putting any salary over £50k into a pension since you would be being paid to do so!!

nervousfrog

Thanks for the responses.

It mashed my head writing it.

Murgatroyd21

nervousfrog wrote: »

Hi,

It's my first post here so please be gentle.

I have been trying to work out how the upcoming changes in CB are going to affect my family. If my maths are correct I just can't believe what I am seeing. I hope someone can spot an error in my maths?

A bit of family back ground first we have 5 children two of them are disabled. She currently receives some child tax credit due to the two disabled children.

I have been trying to workout the impact of additional earnings from my variable annual bonus and overtime claims to our household income.

This is what I have come up with.

Tax credits Calculation

Withdrawal rate for tax credits 41% or £410 for every £1,000 of income above £15,860. If you are working the first threshold is £6420 before the 41% taper rate.

Current child benefit for 5 children £3,800

Withdrawal rate for child benefit at 10% for every £1000 pounds over £50k which works out at £380 per £1000 in your case

Tax and benefit lost on earnings over £40k per £1000

£420 income tax
£410 Tax Credits

House hold income + £170 per £1000 earned. No, they don't deduct money from your income, the amount of tax credit help you may get over and above your income earned is reduced by 41%.

Tax an benefit lost on earnings over £50k per £1000

£420 income tax
£410 Tax Credits
£380 in child benefit

House hold income - £210 per £1000 earned.

Does this add up?

Regards,

Rob.

Quite simply, no. You are using the wrong income threshold for tax credits to begin with, and you are applying the 41% taper against paye income rather than tax credit entitlement after calculations based on elements and income.

zagfles

Murgatroyd21 wrote: »

Quite simply, no. You are using the wrong income threshold for tax credits to begin with, and you are applying the 41% taper against paye income rather than tax credit entitlement after calculations based on elements and income.

The basics look right to me. Yes the tax credits threshold should have been £6420 and the £40k should have been about £42.5k (£41.5k in 2013/14). But the marginal rates look right.

And with 5 kids, 2 with disabilities, tax credits would be payable on incomes up to at least £66k. So income in the range £6420 up to £66k would cause tax credits to taper by £410 per £1000.

So added to tax, NI and ch ben withdrawal he will have an effective tax rate of well over 100% between £50k and £60k.

If the OPs income is between 50-60k pension contributions are a no-brainer as stated above, or maybe gift aid to favourite charity! The OP would be worse off on £60k than on £50k!

Murgatroyd21

zagfles wrote: »

The basics look right to me. Yes the tax credits threshold should have been £6420 and the £40k should have been about £42.5k (£41.5k in 2013/14). But the marginal rates look right.

And with 5 kids, 2 with disabilities, tax credits would be payable on incomes up to at least £66k. So income in the range £6420 up to £66k would cause tax credits to taper by £410 per £1000.

So added to tax, NI and ch ben withdrawal he will have an effective tax rate of well over 100% between £50k and £60k.

If the OPs income is between 50-60k pension contributions are a no-brainer as stated above, or maybe gift aid to favourite charity! The OP would be worse off on £60k than on £50k!

No, he doesn't have a tax rate of over 100%. You are implying the withdrawals are applied to his income rather than treating them separately.

Income = Tax applied as appropriate. Each additional £1k still leaves the same additional amount after applying tax.

CB = £3842.80pa based on 5 eligible children, reduced by 10% for each £1k over £50k, so CB reduced by £384.28 for each additional £1k income.

Tax Credits are reduced by £410 for each £1k increase in income, but only applied against the tax credit award, not his PAYE income.

His total household income INCLUDING child benefit and tax credits will reduce overall as his income increases until the only increase he will see is the amount after tax of income, due to no further benefits entitlement.

In summary, they are separate and not cumulative rates, applied only to specific parts of income and benefits, so

Tax rate remains the same until he reaches a new tax bracket.

Child Benefit has a reduction rate of 10% against child benefits with each £1k income increase above £50k until no child benefit payment

Tax Credits have a withdrawal rate of 41% on credits for each £1 above £4620 until award reduced to £26pa (minimum payment allowable for tax credits), then 0 award.

zagfles

Murgatroyd21 wrote: »

No, he doesn't have a tax rate of over 100%. You are implying the withdrawals are applied to his income rather than treating them separately.

I wrote effective tax rate.

What the deduction is applied to is irrelavant when everything is totalled. The fact is that the OP has a marginal deduction rate of over 100%. Every £1 he earns over £50k (up to £60k) will make his family worse off.

If I were in his position I would be shoving everything I could into a pension. Definitely everything above £50k, also everything above £42.5k if I could afford to, since that would get 81% effective tax relief, or even 83% if salary sacrifice.

Income = Tax applied as appropriate. Each additional £1k still leaves the same additional amount after applying tax.

CB = £3842.80pa based on 5 eligible children, reduced by 10% for each £1k over £50k, so CB reduced by £384.28 for each additional £1k income.

No it isn't. CB is withdrawn via an income tax charge applied to his earned income. Look at the budget documents. There is no taper in child benefit itself, the only option is to stop claiming it.

Tax Credits are reduced by £410 for each £1k increase in income, but only applied against the tax credit award, not his PAYE income.

Yes. And? It still a marginal deduction rate of over 100%. What the deduction is applied to is irrelavent.

Murgatroyd21

zagfles wrote: »

I wrote effective tax rate.

What the deduction is applied to is irrelavant when everything is totalled. The fact is that the OP has a marginal deduction rate of over 100%. Every £1 he earns over £50k (up to £60k) will make his family worse off.

If I were in his position I would be shoving everything I could into a pension. Definitely everything above £50k, also everything above £42.5k if I could afford to, since that would get 81% effective tax relief, or even 83% if salary sacrifice.

No it isn't. CB is withdrawn via an income tax charge applied to his earned income. Look at the budget documents. There is no taper in child benefit itself, the only option is to stop claiming it.

Yes. And? It still a marginal deduction rate of over 100%. What the deduction is applied to is irrelavent.

Don't talk nonsense. The withdrawal rates and reductions are applied against specific incomes and benefits. His family doesn't lose out as income rises.

What he does see, is his tax rate remains the same, applied to his income as normal, so still getting additional income each time his salary increases.

His government aid reduces as his income increases. Simple. The idea of government benefits is to provide financial support where income is below a certain figure, but to be ended where sufficient self earned income reaches a certain point, no longer requiring public money.

Child benefit and tax credits aren't taken in to account when deciding the tax payable on his income. They have their own withdrawal and reduction processes that only apply to them, actioned in regard to changes in other taxable household income.

I think your view that every £1 he earns over £50k making his family worse off is a very deliberate and skewed approach, as it doesn't make them worse off, just less dependant on public money funding his lifestyle due to additional entitlement reducing or ending.

You've already suggested ways he can avoid a reduction in public money, so he can maintain getting money from the public purse, so no need for me to comment there.

zagfles

Murgatroyd21 wrote: »

Don't talk nonsense. The withdrawal rates and reductions are applied against specific incomes and benefits. His family doesn't lose out as income rises.

Err, yes they do, as demonstrated in the OPs figures and confirmed by others. If you think we're all wrong, then you work out what his family's net income will be on £50k, then on £60k.

What he does see, is his tax rate remains the same, applied to his income as normal, so still getting additional income each time his salary increases.

His government aid reduces as his income increases. Simple.

And the total of the tax/NI he pays, and the tax credits/benefits he loses for every extra £1 earned are the marginal deduction rate (or effective tax rate). Simples. If you don't understand the concept of MDRs see the budget document, or the IFS site, they are explained there. Your pedantic point about what the reduction applies to is irrelavant to the MDRs, which is what we're discussing.

Or perhaps you have some objection to MDRs being analysed? Tough, the govt does it, and the likes of the IFS do it, and there's nothing wrong with doing it on forums which discuss benefit entitlement.

Murgatroyd21

Droll and disingenuous. It was simpler to say people on incomes over £50k are !!!!ed about the loss of CB as it is purely the reduction in CB that changes the income details. You are trying to represent it as a tax deficit when it clearly isn't. Just a cute way of trying to gain sympathy for a higher rate taxpayer losing child benefit payments. Get over yourself.

Obviously the total household income will reduce with the reduction in CB, but the OP has actually benefited from the increased threshold before the application of the reduction than the previous intended figure.


Gross 50k Net 35778 TC 6687 Total 42465 CB 3800 w/CB 46265
Gross 51k Net 36358 TC 6277 Total 42635 CB 3420 w/CB 46055
Gross 52k Net 36938 TC 5867 Total 42805 CB 3040 w/CB 45845
until
Gross 60k Net 41578 TC 2587 Total 44165 CB 0 w/CB 44165

Some would say on £50k he was getting 9% more than he should have. At 59k 1% more!

The figures show a continual household increase in income before CB and TC. Even with TC it would continue to increase up to £60k.