Hello, my name is Alan and I’m 43. I’m married to Debbie and we have two children – Katie, aged 14 and Aaron who's 12. Debbie works part-time as a pre-school nursery assistant, as well as in a supermarket one night a week and earns approximately £7,000 a year. I work for a telecommunications company as an account manager and have total earnings of approximately £43,000. We are both basic rate tax payers.
We currently claim Child Benefit of £33.70 per week for the kids and this goes towards their clothing, school dinners and trips etc. Whilst Katie can leave school at age 16, she wants to stay on at sixth form and then possibly go to university and Aaron has to stay on until 18 anyway.
We are already aware that from next April we will lose the ‘family element’ of the Child Tax Credit (CTC) payment of up to £545 each year, as our household income will be above the new limit of £40,000, but we have also heard in the news that Child Benefit is also changing.
I’ve read in the press that this only affects higher rate tax payers and therefore we shouldn’t be affected, but have also been told by a colleague that we could still lose it and don’t understand why. On top of the lost CTC, we really cannot afford to lose a further £1,750 each year and were actually hoping to start saving a small amount of this in the future, in case Katie goes to university, as currently we’ve got no investments or savings to speak of.
This has prompted me to speak with my financial adviser for help. He explained that Child Benefit will be withdrawn from January 2013 for families where one or more parent is a higher rate taxpayer and that contrary to press speculation, Child Benefit will (at present anyway) continue to be paid for children up to age 19 if in full-time education.
However, he has advised that due to changes in the personal allowance and basic rate tax bands from April 2011, I could become a higher rate tax payer and lose Child Benefit. He explained this is because that whilst I am currently a basic rate tax payer, as the higher rate tax threshold is reducing to £42,375 (below my total earnings), I will become a higher rate tax payer and we will lose Child Benefit – the Child Benefit Trap!
He has advised the options available to me, in order to remain a basic rate tax payer, are to reduce my salary (through requesting a pay cut or salary sacrifice to fund a personal pension) or increase my basic rate tax band (through charitable giving or making a contribution into a personal pension). Taking a pay cut or charitable giving is not appealing and whilst I would like to put additional money into a pension, it is not a priority as we cannot afford to.
However, my adviser has highlighted that by requesting my employer to allow salary sacrifice of only £625 into their personal pension scheme (at a net cost of £375 to me) we would recoup the Child Benefit in full and overall be approximately £1,377 better off. As there would also be a saving in mine and my employers NICs, they might also contribute.
He has also pointed out that an alternative was for me to make a £500 contribution into my own personal pension (grossed up to £625 with tax relief), which would also recoup the Child Benefit, as well as fund for retirement.
Although both methods recoup Child Benefit and mean that I invest £625 (with tax relief) into a personal pension, the one that appeals to me most, is making a contribution into my own personal pension, as this provides me with a more flexible approach to funding for my retirement in future.