Child benefit, higher rate tax and considering pension AVCs - Am I higher rate tax payer.. maybe?

HCIMbtw

Hi there, 
My wife and I have just had a baby and I am trying to work out how the whole child benefit thing is going to work and complicate tax for us.. She is currently on statutory maternity pay.

I earn £49,600 base salary. So I don't have to worry about higher rate tax. But I do because I get a car allowance, about £5k, and also (occasionally) receive an annual bonus in April, this year it will be about £4,000 pre tax. Some years it will be £0.

I pay 5% salary into pension as salary sacrifice, and a further 10% of salary into pension as voluntary contributions (wish this could be salary sacrifice but HR department wont have it). 

So base salary £49,600, bonus £4,000, car allowance £5,000. Total £58,600
Pension salary sacrifice is about £2,500. 
Pension AVC non salary sacrifice about £5,000.  

From using the government calculator for child benefit tax I input base salary (net the salary sacrifice pension contributions), so would put in £56,100. Then the government calculator appears to allows me to also deduct the £5,000 AVCs as an 'Allowable deduction' - Am i Interpreting this right, that I can deduct the AVCs? 

So if my circumstances stay the same going forward it would make sense for me claim child benefit, and complete an annual tax return in April to pay the tax difference based on my salary banding, using the above methodolgy? I don't need to notify my employer, or change my tax code for PAYE for paying the child benefit tax? 

If this all makes sense and I am allowed to consider AVCs as not salary (or deductable against salary) I will probably look at increasing my additional voluntary contributions a little bit more so I simply don't ever go over £50k and claim all the child benefit without having to complete an annual tax return? 

Appreciate any help advising if am interpreting this right

Dazed_and_C0nfused

There are multiple methods of contributing to a pension.

You do not include salary sacrifice as you aren't contributing, you are agreeing to a lower salary in return for your employer contributing more to the pension.  So your starting point would be £56,100 not £58,600.

As far as the AVC contributions you do pay are concerned you need to clarify if these are net pay (reduces salary for tax purposes but not NI purposes) or relief at source where you get 25% added to the contribution for basic rate tax relief.

It will make a big difference in your situation.

You also need to read up on adjusted net income as that is what the HICBC is based on.
For example you have to include taxable interest and dividends even if no tax is actually payable on them due to the 0% tax rates in place for those income types.

There are reasons to claim Child Benefit even if you ultimately have to pay it all back, effectively an iterest free loan from HMRC being one, NI credits another.

There are ways of effectively keeping this separate from your PAYE tax code, that is upto you how you want to structure things.  If the amount owed (including any income tax owed) is less than £3,000 you will have the option to pay the tax due for 2020:21 on 31 January 2022 or have it included in your 2022:23 tax code.

calcotti

Dazed_and_C0nfused said: There are reasons to claim Child Benefit even if you ultimately have to pay it all back, effectively an iterest free loan from HMRC being one, NI credits another.

And there is option for wife to claim in order to get the NI credits but opt to not be paid in which case no tax will be due.

HCIMbtw

Dazed_and_C0nfused said:

There are multiple methods of contributing to a pension.

You do not include salary sacrifice as you aren't contributing, you are agreeing to a lower salary in return for your employer contributing more to the pension.  So your starting point would be £56,100 not £58,600.

As far as the AVC contributions you do pay are concerned you need to clarify if these are net pay (reduces salary for tax purposes but not NI purposes) or relief at source where you get 25% added to the contribution for basic rate tax relief.

It will make a big difference in your situation.

You also need to read up on adjusted net income as that is what the HICBC is based on.
For example you have to include taxable interest and dividends even if no tax is actually payable on them due to the 0% tax rates in place for those income types.

There are reasons to claim Child Benefit even if you ultimately have to pay it all back, effectively an iterest free loan from HMRC being one, NI credits another.

There are ways of effectively keeping this separate from your PAYE tax code, that is upto you how you want to structure things.  If the amount owed (including any income tax owed) is less than £3,000 you will have the option to pay the tax due for 2020:21 on 31 January 2022 or have it included in your 2022:23 tax code.

Thanks, my AVCs are net pay, the firs type you describe with no NI benefit.

Regarding adjusted net income from dividends or interest it is irrelevant, all savings I have are in tax exempt wrappers e.g. ISA, Premium bonds. I read up on the HICBC guidance on the Gov website, is what brought me to the calculator and the question about how to account for the AVCs. 

The amount owed in tax each year for the child benefit would be about £1k or less.. as £1k is about the value of it.  

I really find the route of using AVCs to make myself exempt from paying tax on the benefit the most appealing. Even though child benefit is a modest amount of money, just avoiding headaches for tax submissions seems preferable. But just the question about whether the AVCs technically reduce my income or not for tax purposes. 

HCIMbtw

calcotti said:

Dazed_and_C0nfused said: There are reasons to claim Child Benefit even if you ultimately have to pay it all back, effectively an iterest free loan from HMRC being one, NI credits another.

And there is option for wife to claim in order to get the NI credits but opt to not be paid in which case no tax will be due.

Thanks, would probably make sense if she weren't going back to work. 

Dazed_and_C0nfused

If they are net pay you totally ignore them when it comes to tax and HICBC, they will have already reduced your taxable pay that gets reported on your P60 and you will therefore have received the maximum possible tax relief due.

For example,
Salary etc £58,600
Salary sacrifice £2,500
AVC £5,000
Taxable pay £51,100

That is your starting point, you cannot deduct the AVC as they are already accounted for in arriving at your taxable pay.

If you want to avoid the HICBC altogether you would need to pay additional pension contributions or make Gift Aid donations.

HCIMbtw

Dazed_and_C0nfused said:

If they are net pay you totally ignore them when it comes to tax and HICBC, they will have already reduced your taxable pay that gets reported on your P60 and you will therefore have received the maximum possible tax relief due.

For example,
Salary etc £58,600
Salary sacrifice £2,500
AVC £5,000
Taxable pay £51,100

That is your starting point, you cannot deduct the AVC as they are already accounted for in arriving at your taxable pay.

If you want to avoid the HICBC altogether you would need to pay additional pension contributions or make Gift Aid donations.

Or just not earn a bonus which is quite likely most years, thanks for the guidance/feedback

daveyjp

Or use the bonus and invest more in your pension.

Not sure I understand the post by Calcotti.  By all means have your wife as CB beneficiary, but if there are earnings above £50k in the household (husband or wife), High income child benefit charge is due.

Your approach to receive CB, save it and then complete a tax return and repay what is due is sensible (remember you have until January of the year following the tax year (9 months) to submit the return), especially with a variable income hovering around the amount the HICBC kicks in.

calcotti

daveyjp said: Not sure I understand the post by Calcotti.  By all means have your wife as CB beneficiary, but if there are earnings above £50k in the household (husband or wife), High income child benefit charge is due.

calcotti said: And there is option for wife to claim in order to get the NI credits but opt to not be paid in which case no tax will be due.

As stated, there is an option to claim CB but not receive it. As payment is not received there is no tax liability but the NI credits still accrue.
High Income Child Benefit Tax Charge - GOV.UK (www.gov.uk)

If you choose to not get Child Benefit
You can still fill in the Child Benefit claim form. You need to state on the form that you do not want to get payments.
You need to fill in the claim form if you want to:

• get National Insurance credits, which count towards your State Pension

• ensure your child gets their National Insurance number automatically before they’re 16 - otherwise they need to apply for one themselves