Can making pension contributions increase your entitlement to state benefits?
Child benefit is the principle benefit payable to people who are responsible for children under the age of 16 or who are aged under 20 and are in full time education. The benefit is not only available to birth parents but to adoptive and foster parents also. As soon as the first child is born, the parent is entitled to a flat rate amount of £20.70 per week in the current tax year (2017/2018). For any additional children that are born after the first, the parent becomes entitled to a further £13.70 per week per child.
It is not means tested, but the benefit is withdrawn to high income households by the high income child benefit charge. This charge applies to households where at least one of the parents has an adjusted net income of over £50,000.00. The charge is 1% of the child benefit that is received for every £100 of income that exceeds £50,000.00 and must be reported on the individuals self-assessment form.
For example:
Les Tissier has an adjusted net income of £55,000 and has three children. Before the high income child benefit charge he could expect to receive £2,501.20.
As Les is £5,000 over the adjusted net income limited of £50,000, this means that the child benefit he could receive will be reduced by 50%.
This is calculated as £5,000 divided by 100 = 50%
Therefore the child benefit reduces by 50% of £2,501.20 to £1,250.60.
Here we used the term adjusted net income. But what does this mean exactly? This is total taxable income less certain tax reliefs, including:
- Pension contributions paid gross (before tax relief)
- Pension contributions where the pension provider has already applied tax relief at basic rate
- Trading losses
- Donations made to charities through Gift Aid
Therefore, one way to reduce a clients adjusted net income meaning that they are no longer subject to the high income child benefit charge would be to make pension contributions.
For example:
Pauline Wotton has a salary of £52,000 a year and has one child which gives an entitlement to child benefit totalling £1,076.40. Based on this, she is subject to the charge which means that her child benefit is reduced by 20%
This is calculated as £2,000 divided by 100 = 20%
The child benefit reduced by 20% of £1,076.40 to £861.12.
But if Pauline makes a gross contribution of at least £2,000, it means her adjusted net income will be less than £50,000 and she will no longer be subject to the high income child benefit charge
If she were to make a contribution, she would be entitled to receive tax relief on this. For further information about tax relief, we have a section in our technical section of the website with some Frequently Asked Questions.
The information contained within this guide is for information purposes only and does not constitute financial advice. The information provided is our understanding of the tax rules as at the date of writing and our interpretation of FCA rules. We strongly recommend you take independent financial advice from a FCA authorised individual and tax advice from a suitably qualified tax adviser so they can tailor recommendations that will match your personal circumstances and your future requirements.
