Boost your Child Benefit and pay less tax with a pension top-up

Every year, around March, the UK Government holds its Spring Budget.   Here they announce upcoming changes to tax rules, State Benefits or funding and investment for the year ahead.

As a father of two, one of the recent announcements that excited me most was a change to the Child Benefit rules.  It has the potential to positively impact the finances of many families across the UK and with a few small adjustments to your Financial Plans, it could benefit yours too.

What is Child Benefit?

Child Benefit is a regular payment made by the government to parents or guardians of children up to age 16 (or 20 if they are in further education).  You can receive up to £25.60 per week in respect of your first child and £16.95 for every additional child. Although this might seem like a small sum at first, when added up over the year it becomes a considerable benefit and as an added bonus, it’s completely tax-free!

In 2013, the government began to reduce the amount of Child Benefit payable to families where the highest-earning parent earned more than £50,000 p.a.  This measure was known as the Child Benefit High Income Charge. As a result, many families saw their payments reduced and in instances where the highest-earning parent earned more £60,000, they lost entitlement altogether.

What has changed?

From April 2024, families where the highest-earning parent earns up to £80,000 p.a, will now receive some or all of the benefit.  If you think you might fall into this category, HMRC has produced a handy calculator to help you understand how much you could be entitled to. You can also find a basic summary below:

What else changed in April 2024?

If you are resident in Scotland for tax purposes and earn more than £28,500 p.a, you are likely to pay more tax than you did last year.  Higher earners will pay significantly more tax; income over £75,000 p.a will now be subject to a new “Advanced” rate of tax at 45%, and earnings over £125,140 will fall under the “Top” bracket and taxed at 48%.

How can I reduce the tax I pay while increasing my entitlement to Child Benefit?

The government wants us to save more for our retirement. It offers a tax incentive to people who top up their pension, known as “Tax Relief”.  This allows you to save tax at the highest rate you pay, on money you put into your pension.   If you’d like to learn more, you can find a great resource here.

Due to the way HMRC calculates your entitlement to Child Benefit, topping up your pension can increase your entitlement to the benefit.

As a basic example, a parent of two, resident in Scotland, earns £80,000 p.a and pays £4,000 of it into their personal pension.

This could have multiple benefits:

1. Their £4,000 contribution will automatically benefit from Tax Relief at 20%, boosting their contribution to £5,000 and paving the way for a more comfortable retirement.
2. They should now be entitled to a partial Child Benefit payment that they wouldn’t have received previously. This could provide them with an extra £553.60 each year.
3. As they are “Advanced Rate” Taxpayers, they can apply for additional Tax Relief of 25%, or £1,250 on their contribution. This can be done through Self-Assessment and generally takes the form of a reduction in the tax they pay on future earnings.

In this example, the combined benefit of a £4,000 pension contribution would be £2,803.60.  Or another way of looking at it – due to tax relief and an increased entitlement to Child Benefit, a £4,000 pension contribution can cost as little as £1,196.40.

Depending on the type of pension arrangement you have, Tax Relief may be applied differently but the overall effect will be the same.

If your employer offers a Cycle to Work, Payroll giving, Gym Membership or Sharematch scheme, subscribing to these can also boost your Child Benefit entitlement.

What to do next

Retirement and tax planning can be complex. If you are a parent or guardian and would like to understand more about the potential benefits of topping up your pension or how to increase your Child Benefit, get in touch with Ranald Hall to discuss further.