High Income Child Benefit Tax Charge

A look at how making a pension contribution can be used to reduce or eliminate the high income child benefit tax charge.

Key Points

The high income child benefit tax charge applies to anyone or their partner who claims child benefit, where their adjusted net income is over £50,000.

The charge equates to 1% of the child benefit for every £100 of adjusted net income over £50,000. Where adjusted net income is £60,000 or more, the charge equals the amount of the child benefit.

The child benefit can continue to be paid in full alongside the high income child benefit tax charge or the recipient of the benefit can opt out of receiving child benefit payments to avoid a tax charge on the relevant partner.

Pension contributions can reduce total net adjusted income to either reduce or completely negate the high income child benefit tax charge.


What is the High Income Child Benefit Tax Charge?

Who does it apply to?

The high income child benefit tax charge applies to:

  • Individuals with adjusted net income over £50,000 if either they or their partner receives child benefit, or
  • The partner with the highest income, where both partners have adjusted net income over £50,000

Who is a partner?

A partner is classed as someone the individual is:

  • Married to
  • In a civil partnership with
  • Living with as if married/in civil partnership

It doesn’t include anyone they are permanently separated from.

How does it work?

Individuals need to work out their adjusted net income:

  • If this is over £50,000, the tax charge equates to 1% of their child benefit for every £100 of adjusted income over £50,000
  • If this is £60,000 or over, the tax charge will equal 100% of the child benefit

Individuals or their partner can:

  • Choose to opt out completely and forgo their entitlement to child benefit; or
  • Continue to claim child benefit and pay a tax charge at the end of each year

How can a pension contribution help to mitigate this charge?

Making pension contributions to reduce or cancel the charge

  • By making a pension contribution an, individual can reduce their overall adjusted net income
  • Where this reduces net adjusted income between £60,000 and £50,000 an individual can effectively reduce or eliminate the high income child benefit charge or restart their child benefit where they had opted out of claiming it
  • Individuals will also receive tax relief at their highest marginal rates on the pension contribution

Example - Martin & Laura

  • Martin’s net adjusted income is £63,000; and
  • He has a high income child benefit tax charge of £2,501.20
  • The charge is equal to the full amount of child benefit his wife Laura receives for their three children

  • Laura, his wife, is a homemaker; and
  • She receives child benefit totalling £2,501.20
  • This comprises of:
    • - £1,076.40 for their first child; and
    • - £712.40 each for their other two children

 

 

  • A gross pension contribution of £13,000 reduces Martin’s taxable income to £50,000
  • A child benefit high income charge no longer applies
  • He will also pay less in overall income tax in addition to the savings on the child benefit high income tax charge

The result:

Effective cost to Martin:
£5,298.80

Effective rate of tax relief is:
59%


Planning considerations

Pension contributions can help clients:

  • Make full use of the annual allowance
  • Utilise any carry forward of unused allowances
  • Build retirement benefits

Pension tax planning can help clients:

  • Reduce or eliminate the high income child benefit tax charge
  • Help the partner claiming the benefit, (if not working), continue to claim national insurance credits towards state pension
  • Reduce tax due on other investment gains realised within the tax year

This briefing note is also available as a PDF

This document is based on Canada Life’s understanding of applicable UK tax legislation and current HM Revenue & Custom’s practice, as at February 2019 and could be subject to change in the future. It is provided for professional advisers only. Any recommendations are the adviser’s sole responsibility.

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