Understanding High Income Child Benefit and Pension Costs…
What do you need to know?
Introduction
Navigating the complexities of the UK tax system can be difficult, especially when certain charges catch you off guard. Among these often overlooked areas are High Income Child Benefits (HICBC) and pension tax charges. These measures can be important, but many taxpayers are unaware of their existence or do not know how to apply them. In this article, we’ll explore both, explaining why it’s crucial to stay vigilant.
High Income Child Benefits (“HICBC”)
The HICBC is an additional tax that affects those who claim child benefit but whose income exceeds a certain threshold. Introduced in 2013, it aims to recover family allowances paid to the highest incomes. Although it has been in effect for over a decade, many taxpayers are unaware of this tax, often to their detriment.
Fees apply when the claimant or their partner earns more than £60,000. As income levels rise, a portion of child benefit is effectively taxed, and when income reaches £80,000, the full amount of child benefit is taxable.
Let’s explain
For example, for every £2,000 earned above £60,000, 10% of the maximum Child Benefit amount is refunded. Therefore, if a person earns £75,000 a year, they must repay 75% of their child benefit. In turn, once an individual reaches £80,000, the fee will be equal to 100% of the entitlement.
What makes this charge tricky is that it applies to the highest income in a household. Even if it is not this person who benefits from the allowance. This can come as a surprise to many families, especially those whose incomes fluctuate or those who are unaware they have crossed the threshold. Failure to register with HICBC can result in penalties, and many don’t realize they need to notify HMRC if their circumstances change.
Pension costs for high earners
Pension contributions are another area where high earners need to be careful, particularly because of the annual allowance and decreasing annual allowance.
The annual allowance is the maximum amount of tax-free pension contributions you can make in a given tax year, recently increased to £60,000. If this limit is exceeded, taxpayers may face additional tax on the excess.
For high incomes, the reduced annual allowance further reduces this ceiling. If your ‘adjusted income’ (your total taxable income including pension contributions) exceeds £260,000, your annual allowance reduces by £1 for every £2 of income above this threshold, down to a minimum allowance of £10,000.
Let’s explain
To illustrate this, let’s focus on someone with an adjusted income of £320,000, including pension contributions of £40,000. As this income is £60,000 above the taper threshold, this would result in a £30,000 deduction from the annual pension allowance. Thereafter, £10,000 of pension contributions will be subject to the annual pension charge.
Many high-income taxpayers contribute to their pensions automatically, through salary sacrifice plans or company contributions. This can cause you to exceed the annual allowance without realizing it, especially if your income fluctuates or increases unexpectedly.
Exceeding your annual allowance triggers a tax charge, which must be declared via self-assessment. Much like HICBC, many taxpayers ignore this requirement, which can result in hefty charges and penalties.
Ask for advice
With careful tax planning and careful monitoring of your income, you can avoid unnecessary fees. However, given the complexities involved, seeking advice from a tax professional is often the best way to ensure compliance and avoid unexpected tax bills. A tax advisor can help you identify potential issues before they become problems.
Both high-income child benefits and pension tax charges for high earners are areas that can result in unexpected tax liabilities. Although these fees are far from new, they remain unknown to many taxpayers. By staying informed and vigilant, you can avoid falling into these common traps and ensure you don’t face unexpected charges and penalties.
Next steps
When in doubt, seeking the advice of our tax experts can save you a lot of time, stress and money in the long run. The ETC Tax team can advise and guide you given the complexities involved. Please contact us if you would like to discuss this.
