How to use child benefit loophole to boost your payments every year

CLEVER financial planning means that parents on a higher income can use a loophole to boost their child benefit payments.

The taper on child benefits affects over a million families where one or more parent earns more than £50,000 a year.

The way the system works is complicated but understanding means there is a way for you increase your payments and avoid having to pay child benefit back.

Families in the UK can claim the support to help with the cost of bringing up children.

For the 2021/22 tax year, payments are worth £21.15 a week for your first child and £14 a week for any additional children.

Everyone who makes a claim is paid the same amount.

But families where one or both parents earns £50,000 a year or more - have to pay a portion of the support back.

For every £100 the highest-earning parent earns above the threshold, they must repay 1% of their child benefit.

This means parents earning over £50,000 a year must also file a self-assessment tax return.

Households have to pay back the entire child benefit payment if one or more parent earns more than £60,000.

The system has been widely criticised because it unfairly targets single parent families or those where one parent stays at home.

That's because it is targeted on individual income rather than household income. So, if two parents earn £49,999.50 each (£99,999 in total) they keep the whole benefit.

But if just one person earns £50,000 - even if they are a lone parent or their partner doesn't work - they start to lose some of the child benefit payments.

Loophole to increase payments

For families earning above that £50k threshold, there is an option that could mean you keep the whole benefit.

A loophole in the system means that upping your pension contributions will lower the income HMRC takes into account.

So if you earned £53,000 a year, but paid £3,001 into your retirement fund, you'd drop back below the threshold and keep all the child benefit.

"When HMRC decide how much high income child benefit charge to take, they measure your income after deducting any pension contributions you are making," explained Steve Webb, partner at investment firm Lane Clark & Peacock.

"Putting more money into your pension lowers the amount which HMRC consider when working out your child benefit charge."

The loophole applies to other salary sacrifice schemes too, such as childcare vouchers, cycle to work schemes or a company car.

But Mr Webb warns HMRC will be on the lookout for anything that appears to be a tax dodge, for example, if you work for your own company and pay yourself a reduced wage and higher dividends.

Of course, you should only increase your pension contribution if you can afford to as it will also reduce your take-home pay.

If you can afford it, boosting your pension has other benefits too.

For instance, you get tax relief on the payments and if you pay into a workplace scheme, your employer may up their contributions too.

The loophole also applies if someone else other than an employer has paid into your pension fund, for example a parent or partner.

HMRC will take the amount equal to their contribution off your income when calculating how much child benefit you owe, leaving you to hold on to more of the money.

The hole in the system mainly benefits those who earn between £50,000 and up to £60,000.

"Saving for a pension is always worth looking at, but can be particularly attractive for families where one partner is earning over £50,000 per year, said Mr Webb. 

"On top of all the other advantages of saving into a pension, this is an extra bonus for families in this income range."

Millions of families saw child benefit payments rise in April as a new tax year began.

One million couples are also being warned to check their benefit payments as families could be missing out on £40,000 each.

Parents have lost out on £6.8billion since the child benefit cap was introduced in 2013.

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