Planned changes to child benefits mean that pension salary sacrifice schemes will be more attractive for higher earning households.
For a family with three children, child benefit is worth around £2,600 a year, said Mike Ambery, retirement savings director at Standard Life. However, the benefit has been means tested since 2013, so families with one parent earning £50,000 or more have been affected by the high-income child benefit charge, which claws back payments. Yet homes where two parents earn £49,000 each are eligible for the full benefit.
In the Spring Budget on 6 March, chancellor Jeremy Hunt said he wanted to address this disparity. Hunt said the government will consult on plans to move the high-income child benefit charge to a household-based system to be introduced by April 2026.
He also said the threshold for the high-income child benefit charge would increase from £50,000 to £60,000, from April 2024. The top of the taper for withdrawing child benefit will also increase to £80,000.
Ambery said people still eligible for the charge can reduce the impact “and end up net better off” by increasing the amount they pay into their pension via salary sacrifice.
“Paying into your pension reduces what counts as your income, and it could allow you to keep your child benefit and boost your pension savings at the same time.
“When the change to basing the charge on household income kicks in some people will find salary sacrifice a more viable option than before as it will be possible for both earners to sacrifice more of their salary, retain child benefit and still have two good incomes – previously it could have made managing the monthly budget harder in the short term.”
He said that people can choose not to take child benefit payments if their earnings are over £60,000, but he urged them to “still consider filling in the child benefit claim form” because this helps people claim national insurance credits, which go towards the state pension later in life.
The amount of high-income child benefit charges people have to pay depends on an individual’s adjusted net income and the amount of child benefit the claimant is entitled to receive.
Adjusted net income is total taxable income minus certain tax reliefs, such as trading losses (for the self-employed), gift aid charity donations, and pension contributions. There is also a child benefit calculator on the government website where families can work out how much tax they may have to pay.
Currently the charge is equal to one percent of a family’s child benefit for every £100 of adjusted net income over £50,000 each tax year. This income threshold will rise to £60,000 from April 2024. For individuals with adjusted net income over £60,000, currently the charge equals the total amount of the child benefit. This income threshold will rise to £80,000 from April 2024.
