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Case Study: Five ways to offset the loss of child benefit

The problem: A married client with three small children is facing losing the full amount of child benefit. What are the options available to offset the loss?

The solution: The deadline to opt out of receiving Child Benefit or face a tax charge via self-assessment to pay back the full amount received was 7 January. This is £20.30 a week for a first child and £13.40 per additional child and a family with three children faces being £2,450 worse off a year, broadly equivalent to nearly a £4,000 pay cut for a 40 per cent taxpayer. However, financial planning can offset the impact of the lost benefit.

Isa allowances

Up to £11,280 per annum can be invested in stocks and shares Isa or £5,640 in a cash Isa. Do not forget to use the allowance for both partners.

Pension contribution

Last month, the Chancellor announced in his December Autumn Statement that the maximum annual allowance for gross contributions will be reduced from £50,000 to £40,000 in 2014.

If you are currently paying income tax at the 50 per cent rate, and it makes sense for you to invest in a pension, there is a compelling case to do so before 6 April since currently you will get effective relief of up to 50 per cent whereas from 6 April it drops to 45 per cent as a result of the scheduled reduction in the additional rate of tax announced in the last Budget.

Pension tax relief works by grossing up your contribution by basic rate tax to enhance the value of the fund but those in the higher and additional rate tax bands are able to make a further reclaim for the balance between the basic rate and their marginal rate via their annual tax return. There is no guarantee that such generous reclaims will last forever.

For a family set to lose £2,450 of child benefit and subject to 40 per cent income tax, a net pension contribution of £9,800 will be grossed up to £12,250 in the pension plan but a further £2,450 could be reduced from their tax bill via self-assessment.

Transfer assets to lower or non-earning spouse

Transferring assets from the higher earner to the lower or non-earning partner will reduce the household tax liability. If the partner does not work, you could turn a big chunk of taxable income into tax free income by utilising their annual personal allowance (currently £8,105 and set to rise next year to £9,205).

Make use of capital gains allowances

Each individual can bank profits on non-tax wrapped investments of up to £10,600 this year without liability to capital gains tax. If there is no new cash to invest in an Isa or pension this tax year but do own shares or funds outside of these tax efficient structures, do consider selling or part selling these to utilise capital gains allowances and recycling the assets into more tax efficient wrappers.

Specialist tax efficient investments

For those who already have or would normally fully utilise the more mainstream allowances above, there are a number of investment schemes which carry statutory tax incentives. These include VCTs, EIS and Seed EIS.

The first two attract an income tax credit of 30 per cent on investment in new shares, providing they are held for at least five years for VCTs or three years for EIS, and the much higher risk Seed EIS scheme attracts and income tax credit at 50 per cent.

There are a myriad of tax benefits designed to provide incentives for the higher risk nature of these schemes but these should only be considered by investors who understand the risks and already have a well-balanced portfolio.

Jason Hollands is managing director, business development and communications, at Bestinvest


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. This is – if I may say so – not much of a panacea. In spendable money terms (using the example) someone with 3 kids will be losing £2,450. The loss is total if one parent earns over £60,000 – not a fortune if this person happens to be the only earner. So where do you suppose he/she is going to find the extra to fund either ISAs or Pension and take a further substantial hit on the cash flow?

    For those earning £100k or £150k and over there is the additional loss of personal allowance as well as even higher rates of tax. I would hazard that many of these are probably paying for some kind of private education – so again the squeeze on cashflow my not make ISA or pension funding that easy.

    If we consider that these higher earners probably work for large companies, a good few of which will have international operations, why not consider the obvious 6th option? Emigrate. Ask for a transfer. If you work for a financial company, many have offices in Switzerland. Multinationals have offices all over the place – volunteer. Admittedly not everyone can avail themselves of this option, but some can and it’s an option worth considering, just as much of the other five in this piece. The UK will be stuck in the doo doo for many years to come – it could even get worse if we exit the EU – so what future is there anyway for your kids in the UK?

  2. Not much of a solution as Harry states.
    How about 2 controlling directors who both earn above he income threshold. Pay a lump sum from savings back into the company to reduce dividends and thus income. Then draw it back in a different tax year. At worst it gains 1 year of CB and a tax rebate probably under self assessment which is a temporary cash flow benefit. Can someone tell me that this doesn’t work?

  3. Annual personal allowance is actually rising to £9,440 from 6 April (not £9,205 as the article states). A small point, perhaps, but if you’re talking about tax planning it’s important to get the details right!

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