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Higher rate taxpayers could gain GBP18,500 on Child Benefit payments and leave themselves GBP120,000 better off in retirement


Analysis from Quilter reveals that parents earning between GBP50k and GBP60k a year could gain as much as GBP18,500 in Child Benefit payments by increasing their pension contributions while also leaving them GBP120,000 better off in retirement.

Calculations show that a family which has two young children with one parent earning GBP59,000, could increase their pension contributions by GBP467 per month which would enable them to claim back over GBP18,500 over the 12 year period that their children are eligible for Child Benefit payments.

Due to the additional tax relief on pension contributions for higher rate tax payers and the extra Child Benefit payments this would mean that it would cost someone just over GBP35k in total over 12 years to gain just under GBP49,000 from these two tax benefits. The long-term result would be to increase their pension pot by over GBP122,000 at age 65, assuming a modest growth of 2 per cent after charges and inflation.

A family with one child can claim up to GBP1,094 a year in Child Benefit and nearly GBP1,800 a year if they have two children.

However, if one earner in a family makes more than GBP50,000 a year, they must pay back 1 per cent of the Child Benefit they receive for every GBP100 over the threshold.

But the High Income Child Benefit Cap (HICB) is on income after pension contributions, so if someone pays more into their pension they can fall below or closer to the threshold, thus increasing the amount of Child Benefit they receive while also taking advantage of the tax relief on pension contributions.

The HIBC was introduced in January 2013 and has significantly reduced the number of families in receipt of Child Benefit. As at the 31st August 2019, there were approximately 7.28m families claiming Child Benefit which is down from 44,000 families from a year earlier.

London, the South East and the North West have the highest number of families in receipt of Child Benefit in the UK.

Ian Browne, pensions expert at Quilter, says: “The Child Benefit system is incredibly complicated and wage inflation has gradually pushed more people over the High Income Child Benefit threshold meaning fewer and fewer families are claiming Child Benefit each year. At the most recent budget, the higher rate tax threshold has been frozen at GBP50,270 but the High Income Child Benefit Threshold of GBP50,000 has not changed with it meaning basic rate taxpayers will get caught for the first time.

“However, parents often don’t realise that they can receive much more in Child Benefit payments by upping their pension contributions while also setting themselves up for a more prosperous retirement and taking advantage of the favourable tax relief available. Although this does mean that someone has to increase how much they are saving for retirement, the benefits mean that the ultimate gain far out strips the spend.

“There is still a significant proportion of people in the UK who are not saving enough for retirement and utilising this quirk in system could help them achieve their retirement aspirations. Everyone’s financial circumstances are different and seeking professional financial advice is always best to ensure that your whole financial life is accounted for.”

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