Child benefit high earner

Intel1982

Hi there my husband earns around £60,000 a year - this all depends on overtime, bonuses etc but last year the amount he earned was around £60k a year. We still receive child benefit but I was under the impression that as we pay additional voluntary contributions to my husband's pension this would negate the charge? Can anyone confirm this for me please? Should we be doing anything else to keep things above board? Thanks. 

Dazed_and_C0nfused

In the scenario you have given additional pension contributions would reduce any HICBC.

And he would get higher rate tax relief on them so overall very tax efficient.

However they will be of no use whatsoever for 2021:22 as that tax year has now ended.

He can start thinking about the current tax year through. 

If you confirm the method he will be using to add to his pension fund I can explain the overall impact.

The usual options are net pay, relief at source or salary sacrifice.  It is quite important for you to understand this otherwise you cannot calculate the right amount to contribute.

Intel1982

He gets his pension taken off his gross wage and then the government tops it up with tax relief and then we pay extra into his pension by direct debit every month from his net wages. My understanding was that if the combination of tax free allowance and pension contributions lowered his overall taxable income to less than £50,000 then we would still be okay to get the child benefit? Thanks. 

Dazed_and_C0nfused

There's a few misconceptions there.

HICBC is based on adjusted net income.  You need to include all types of taxable income, taxable pay, company benefits, interest and dividends etc.

He gets his pension taken off his gross wage and then the government tops it up with tax relief 

That sounds Iike a mix of two methods.  Do you mean his pension is taken from his net pay after tax and NI have been calculated?  And then the pension company adds tax relief i.e. £100 deducted from his payslip becomes £125 in his pension fund?

You are always ok to have the Child Benefit, just sometimes it might have to be paid back.

Intel1982

Thanks for your reply, we only have my husband's income there's no interest, dividends etc.

Yes it is a private pension as my husband works for a small company (it's called the People's Pension) so I believe it is on the net tax basis. 

Im really just looking to make sure he is paying enough into his pension to not have the child benefit taken off us, I do not work and the child benefit is claimed under my name. Im also wondering whether we should be filling out a tax return for this and also to claim further tax relief? I've tried writing to HMRC and to speak to someone online but I've never been able to speak to anyone!

Thanks again. 

Dazed_and_C0nfused

People's Pension can operate both net pay and relief at source methods.

For HICBC purposes there are a big difference in how these work.

Say he earns £60,000 and contributes £6,000 via net pay.  His taxable pay (P60 pay amount) will be £54,000 and if he had no other taxable income or deductions he could claim would pay 40% of the Child Benefit back.

Or he earns £60,000 in taxable pay and pays £6,000 to a relief at source scheme.  The pension company will add £1,500 in basic rate tax relief and his taxable income remains £60,000.  But his adjusted net income is only £52,500 (£60k less the gross contribution of £7,500) so he only pays 25% of the Child Benefit back.

It is crucial you understand what/how he is contributing otherwise you won't be able to complete the Self Assessment return accurately and could pay back more than is needed or end up being investigated by HMRC.

If he has paid higher rate tax in previous tax years and paid relief at source contributions then yes some more tax relief could be due.

But you need to locate his P60's and understand his pension contribution method(s) before taking that further.

Intel1982

I've had another look at his wage slips and it does indeed look like the contributions are from his gross pay. He then pays extra contributions from his net pay. 

In his annual pension statement (Jan 31st 2021 to 1st Feb 2022) it states:

*£3,559.96 husband paid into his pension 

*£300.00 in basic rate tax relief
*£1,196.67 employer contributions

Total is £5056.93

Sorry if I'm not making any sense think I'm getting myself a bit confused, but would it be £60,000-£5,056.93, leaving an adjusted net income of £54,943?

Thanks 

Dazed_and_C0nfused

No, you cannot deduct employer contributions.

That looks like he contributed £2359.96 via net pay, so his P60 taxable pay would be reduced to reflect those.

And £1,500 by relief at source (£1,200 he paid to which £300 tax relief was added).

So he can deduct £1,500 from his P60 taxable pay amount.

Intel1982

Oh dear, this isn't looking good for us then! To be fair it is only in the last year his earnings have gotten so high as he received a big bonus at Christmas. Is our best bet moving forward to cancel the child benefit altogether or to fill in a self assessment form? Thanks again. 

Dazed_and_C0nfused

There is no point in cancelling the Child Benefit if you will end up keeping some (or all) of it.

Pension contributions are very tax efficient in this situation.

If he paid £800 extra using the relief at source option (separate lump sum payment in his case) he will get £200 in tax relief added so £1,000 in his pension fund.

His basic rate band will be increased by £1,000 meaning he pays 20% tax on an extra £1,000 instead of 40%.  So he saves an extra £200 income tax.

And if his adjusted net income was in the range from £51,000 - £60,000 then he would also save paying back 10% of the Child Benefit.  So that amount depends on how many children are being claimed for.

But the end result is he has £1,000 in his pension fund for a real cost of less than £600.