Avoiding child benefit tax

numbersguy

This year is the first year I'll go over the £50,000 child benefit tax (due to a PPI refund)

If I pay the amount over £50,000 (minus pension contributions) into a pension fund, will I avoid having to pay the tax on the child benefit?

xylophone

https://www.gov.uk/child-benefit-tax-calculator/main


https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/reduce-high-income-child-benefit-charge/

numbersguy

Sweet, slightly confused by the calculations, but those really helped, thanks!

xylophone

Sweet,

It's a long time since anybody called me that, you cheeky thing!:rotfl:

FudgeHouse

A bit confused how a PPI refund has pushed you over the High Income Child Benefit Charge threshold of £50K ?

Surely a PPI refund can't be classed as 'income' for this purpose, as you will already have paid Income Tax on the amount refunded before you paid it on to the PPI provider. It's a refund due to a bank error.

numbersguy

It's the interest which is classed as income apparently, although I'm not sure how much that is, it was quite some time ago, so it'll be a fair bit

BoGoF

Paying into a pension to get under the higher rate threshold would be a good idea and not just for the child benefit angle. There is also the higher rate tax on the interest to consider.

numbersguy

Cool, that's what I was thinking. Presumably I'm going to owe the higher rate tax on the interest regardless? Or is it based on net (after pension contributions) amounts for income tax as well? Not really sure how this works

Dazed_and_confused

It is two different calculations.

The High Income Child Benefit Charge is based on "adjusted net income" and the pension contribution could reduce this to less than £50,000.

But your income tax works differently. If you are going to contribute to a "relief at source" pension like a personal pension or SIPP then this doesn't reduce your taxable income. But it does increase the amount of basic rate tax you can pay, which in turn would reduce any higher rate tax payable.

numbersguy

Cool, that makes sense, I think that's what I'll do then. I'll maybe wait until near March so I know how much I need to pay in

Asghar

Dazed_and_confused wrote: »

It is two different calculations.

The High Income Child Benefit Charge is based on "adjusted net income" and the pension contribution could reduce this to less than £50,000.

But your income tax works differently. If you are going to contribute to a "relief at source" pension like a personal pension or SIPP then this doesn't reduce your taxable income. But it does increase the amount of basic rate tax you can pay, which in turn would reduce any higher rate tax payable.

So if someone earns £60,000 and the employer operates a "net pay" arrangement, then paying £10,000 into the workplace pension means that at the end of the year the P60 would show taxable income of £50,000 and that would be okay.

If the employer operates a "relief at source" arrangement, then £8000 (after tax) would be paid into the workplace pension which means at the end of the year the P60 would show a taxable income of £60,000. In this case the person would have to complete a self assessment to input the gross pension figures to bring the adjusted net income down to £50,000 and avoid the child benefit tax charge.

Is that how it works?
I haven't mention the higher rate tax relief for the latter to keep it simple.