If you or your spouse/partner has an income between £50,000 and £60,000, your child benefit is clawed back at the rate of 1% for every £100, and for those earning above this, the claw back equals the whole amount of the benefit received.
By making additional pension contributions, you could retain child benefits. For example, if your income was £60,000 and you paid a net pension contribution of £8,000 (this is grossed up to £10,000 to take into account the tax relief due), your overall income would be reduced to £50,000 for child benefit purposes resulting in no claw back.
This month, new pension rules came into effect meaning that family members may contribute to each others pension pots. Provided you have enough earnings, family pension contributions are a useful way of helping to keep your income below the £50,000 limit and have the added benefit of saving the family member inheritance tax, either by making a gift of the contribution out of normal income, or by being within the annual exempt amount of £3,000 (£6,000 if the previous year’s annual exempt amount was not used).
There is potential to make substantial tax savings! For example, if you have income of around £60,000 and four children, and you decide to make a pension contribution of £8,000 it could save you about £6,500 in income tax and child benefits.
For further information contact Green & Co.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.
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