Politics
Child benefit loophole allows parents to boost payments every year
PARENTS on a higher income can take advantage of a loophole to boost their child benefit payments.
The benefit boost affects families where one or more parent earns more than £50,000 a year.
Parents may be able to keep hold of more of their child benefit payments using a loophole[/caption]
The way the system works is complicated but bear with us because there may be a way for you increase your payments.
Families can claim up to £1,855 a year through the support to help with the cost of bringing up children.
For the 2021/22 tax year, payments are worth £21.15 a week for your first child and £14 a week for and additional children.
Everyone who makes a claim is paid the same amount.
But families where one or both of the parents are higher earners – those paid a salary worth £50,000 a year or more – have to pay a portion of the support back.
For every £100 the highest earning parent earns above the threshold, they must repay 1% of their child benefit payments when they file a self-assessment tax return.
Households have to pay back the entire child benefit payments if one or more parent earns more than £60,000.
Loophole to increase payments
But a loophole in the systems means that upping your pension contributions may allow higher earners to keep hold of the child benefit cash.
“When HMRC decide how much high income child benefit charge to take, they measure your income after deducting any pension contributions you are making,” explained Steve Webb, partner at investment firm Lane Clark & Peacock.
“Putting more money into your pension lowers the amount which HMRC consider when working out your child benefit charge.”
How much is child benefit worth?
THERE are two child benefit rates, one for the eldest child and another for younger children.
- You get £21.15 per week for your eldest or only child (£1099.80 a year)
- You get £14 for each of your other children (£728 per year, per child)
- You get the money for each child under 16 (or under 20 if they stay in approved education or training)
- If families split up, how much you’ll get for each child depends on how you claim.
- If you have 2 children and one stays with you and the other stays with your ex-partner, you’ll both get £21.15 a week for each child.
- If one parent claims for all the children, you get £21.15 for the eldest and £14 for each younger child.
- Only one household can claim for each child
The loophole applies to other salary sacrifice schemes too, such as childcare vouchers, cycle to work schemes or a company car.
But Mr Webb warns HMRC will be on the look out for anything that appears to be a tax dodge, for example, you work for your own company and pay yourself a reduced wage and higher dividends.
Of course, you should only increase your pension contribution if you can afford to as it will reduced your take home pay.
However, the pros of upping your pension contribution is that you already get tax relief on the payments and if you pay into a workplace scheme, your employer may up their contributions too.
The loophole also applies if someone else other than an employer has paid into your pension fund, for example a parent or partner.
HMRC will take the amount equal to their contribution off your income when calculating how much child benefit you owe, meaning you can hold onto more of the money.
The hole in the system mainly benefits those who earn between £50,000 and up to £60,000 – it may only help additional earners reduce the amount they have to repay.
“Saving for a pension is always worth looking at, but can be particularly attractive for families where one partner is earning over £50,000 per year, said Mr Webb.
“On top of all the other advantages of saving into a pension, this is an extra bonus for families in this income range.”
Most read in Money
Millions of families saw child benefit payments rise in April as a new tax year began.
One million couples are also being warned to check their benefit payments as families could be missing out on £40,000 each.
Parents have lost out on £6.8billion since the child benefit cap was introduced in 2013.
