Amid the cost of living squeeze, Kate Smith, Head of Pensions at Aegon, explains the benefits of paying pension contributions to reduce income tax and maintaining child benefit payments for those who are dragged above the thresholds.
• Families dragged into higher rate tax band face double whammy of higher tax and loosing child benefit
• Through increasing pension contributions, people could receive the triple benefit of paying less income tax, benefitting from the full child benefit and receiving 40% tax relief on pension contributions
Kate Smith, Head of Pensions at Aegon comments: “By 2026 over 1 million more people will be dragged into the higher rate tax band due to the freezing of tax thresholds at £50,270. This doesn’t only mean that more people will pay more tax, but that families may face a double whammy by also losing out on valuable child benefit as earnings rise.
“In January 2013, the government introduced new tax rules for high earners who receive child benefit. Where an individual or their partner has pre-tax income of more than £50,000 a year, their entitlement to child benefit is impacted by a tax charge. Where pre-tax income is between £50,000 and £60,000 a year, individuals claiming child benefit have to pay part of it back. And if pre-tax income is higher than £60,000 a year, the whole amount has to be repaid to HMRC.
“These ‘High income child benefit’ thresholds have been frozen now for eight years, dragging more people into scope and losing out child benefit payments. There seems little likelihood that the thresholds will be increased while income tax thresholds are frozen.
“With careful tax planning individuals dragged above the thresholds could pay a personal pension contribution large enough to reduce their income to below £50,000 a year. By doing so, they could receive the triple benefit of less income tax, full child benefit payments and 40% tax relief on their pension contributions.
“Receiving the full child benefit could make a real difference to a family’s immediate financial wellbeing, while increasing pension contributions and benefitting from tax relief at their highest marginal rate will help them to save for later life.”
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