Protect Child benefit - £50k+ Earners

On 21st March 2012 in the Budget the Government announced plans to withdraw child benefit from parents who earn higher levels of income.


This was justified by George Osborne with the statement that “all sections of society must make a contribution to dealing with the deficit.” He went on to say the welfare budget needed to be cut back because social security would consume one-third of public spending if left unchecked.

Until now, child benefit has been universally paid to families of all backgrounds. From January 2013, Households with one person earning more than £50,000 a year will lose some of their child benefit.

Child benefit had been due to be removed from all families with at least one parent paying the higher, 40% rate, of income tax - about £43,000 - from January 2013.

But Mr Osborne said he wanted to avoid a “cliff edge” effect - so it would now only be withdrawn when someone in a household earned more than £50,000, at a rate of 1% of the benefit for every £100 up until £60,000, when it would be cut entirely.

The benefit would only be withdrawn entirely from those where one partner earns more than £60,000 a year.

The benefit will be withdrawn gradually from those where one parent earns more than £50,000. Child benefit totals £20.30 a week for the first child, and then £13.40 for each subsequent child. There is no limit to the number of children that can be claimed for.

So, for a family with two children, one parent would receive £33.70 per week or £1,752.40 per year.

The equivalent in terms of earnings, taking income tax into account, would make it worth £2,190.50 for a basic rate taxpayer and £2,920.67 for a higher rate taxpayer.

Perceived problem

The government had planned to remove the benefit from households in which someone earns more than £42,475 in January 2013.

The perceived problem was an anomaly that a family with a single earner taking home more than £42,475 would lose child benefit, but a couple each earning slightly less than this could take home £80,000 and keep the benefit.

The other issue of debate was the “cliff-edge”. That meant someone earning £42,475 or below would receive the full child benefit. As soon as they earned £42,476, they would lose every penny of the child benefit.

To address this, the benefit will now fall by 1% for every £100 earned over £50,000. That means those earning more than £60,000 will lose the entirety of the benefit.

Entitlement under the original proposals

Some 7.8 million families receive child benefit, of which 1.2 million would have lost their entitlement under the original proposals. The number affected will be lower under the renewed plans.

Three million taxpayers earning over £50,000 will be sent letters in the autumn asking if they or anyone in their household receives child benefit - in order for some to be clawed back through tax from January 2013.

The income tax charge could be levied from monthly pay cheques, via people’s personal tax codes. Otherwise, the first tax bills for child benefit will have to be settled by the end of January 2014.

One possible solution

Brad and Angela have two children and receive child benefit of £20.30 per week for the eldest child and a further £13.40 for the youngest. (that’s the £1,752 mentioned previously). Brad’s salary is £50,000 and Angela’s is £60,000.

On Angela’s income, between £50,000 and £60,000 she will face income tax at 40% and an additional £1,752 (there’s that number again) due to the loss of child benefit, an effective rate of 57.5%

Now, what if Angela made a pension contribution? – to a good pension, mind, not one that has been in the news recently with high & hidden charges, but a decent scheme, with competitive charges, managed and monitored performance and with a financially strong provider – of £10,000.

Because basic rate tax relief of 20% is given automatically, Angela could write a cheque for just £8,000 or pay around £667 per month to get the £10,000 in. She will also receive a further £2,000 rebate when she submits her tax return. Therefore, the net cost of the £10,000 contribution is just £6,000.

In addition to the £4,000 tax relief, she will continue to receive child benefit. This is because the £10,000 pension contribution is deducted from her taxable pay, thus making her salary, for child benefit calculation purposes, £50,000.

So in this example, the family are £5,742 better off.