Working families that are under the higher tax bracket are missing out on up to £171m a year by failing to recognise the connection between their pension contributions and their child benefit.
A parent of a family who earns more than £50,000 a year faces a high income child benefit charge of 1% of their child benefit for every £100 earned above the £50,000. A parent gets a maximum of 100% tax charge when they earn over £60,000 as the tax charge will be equal to the amount of the child benefit that they receive.
Most of the affected families under these income brackets don’t recognise that HMRC measures a parent’s earnings on the basis of income net of pension contributions for the purposes of high income child benefit tax charge.
This means that parents who would want to increase their pension contributions will thereafter lower their income. They will then receive a smaller tax charge due to their lower income and will possibly retain the full child benefit entitlement.
Around 320,000 families are affected by this high income child benefit tax charge as they fall within the £50,000 – £60,000 earnings band. If one parent of these families were to contribute an additional £3,000 per year into their pension, they would reduce their child benefit tax charge by 30%. Across all of these families, this could be a saving of £171m per year on child benefit charges.