How to minimise the child benefit tax charge

I am a management consultant trading through my own Limited Company. I am the only shareholder and director and I expect my salary and dividends for the 14-15 tax year to be about £55,000. My wife and I receive child benefit for our two children and I am concerned that my earnings will mean we have to repay some or all of this back. Can you explain how the Child Benefit withdrawal works and if there are any tax planning ideas to help get around this issue?

 

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Answer:

The child benefit withdrawal kicks in if you or your partner has an individual income of £50,000 or more. Once you go over £50,000 the benefit is withdrawn at a rate of 1% of the benefit for every £100 of income, therefore at an income of £60,000 the full amount of the benefit has been withdrawn. We have worked through a calculation on a previous post here.

In your instance, assuming you have a higher income than your wife (if your wife has a higher income, the tax charge will go on her tax return not yours), an income of £55,000 would see 50% of the benefit withdrawn (a total of £885 given the benefit for two children). This amount is payable 31st January following the tax year in question – so for the 14/15 tax year this amount would be due 31st January 2016.

There are a number of tax planning ideas to help mitigate this withdrawal, some of which are outlined below:

  • Make personal pension payments of £5,000 or more – this reduces your overall income for child benefit purposes to below £50,000 and pulls you out of a benefit withdrawal situation.
  • Reduce dividends to drop your income to £50,000 or below – this can be especially useful if there is no way of transferring income to your spouse without triggering the withdrawal and you can still live comfortably on the reduced level of income. This is also a useful tactic if your children are coming to an age where child benefit will no longer apply.
  • If your income was normally closer to £60,000 then it would be worth considering taking full dividends some years to lose the benefit completely with other years taking less from the company to keep total income in these years less than £50,000 – this is commonly referred to as roller-coaster income.
  • Depending on how much your wife earns it might be worth considering her receiving some of the dividends / salary from your company.
  • If you work from home and are not already charging your company for rent then have a read of our article which explains how you can claim rent costs back from your company – it could be a way of you extracting some of your cash from your company in a more tax efficient way.