From 7 January 2013, all households that include one person with an income of more than £60,000 a year will no longer be eligible for child benefit. This change, confirmed in Budget 2012, is expected to hit about 840,000 families in the UK.
It will cost the average two-child family around £1,700 a year in tax-free income – worth more than £2,800 a year in taxed income at the higher rate of 40 per cent.
Individuals with an income above £50,000 will lose 1 per cent of the allowance per £100 of income. A parent who earns £55,000, for example, will lose 50 per cent of the current benefit.
The result is that 1.2m families will either lose their child benefit or get a reduced payout, according to HM Revenue & Customs (HMRC).
If all this proceeds as planned – and there will be plenty of lobbying against it ahead of the Finance Act receiving royal assent – the most important thing to remember is that the cuts only apply to taxable income. This means that if you manage to reduce your income to below the level at which benefits are no longer payable, you will continue to receive them. For those with two or more children, this will be well worth exploring.
Here are four ways to keep child benefit that will work if your salary is slightly above the £50,000 level:
1) Reduce your hours
This is the most drastic suggestion, but if you earn £55,000 for a 35-hour week and can afford it, you could ask your employer to reduce your hours to 32. This would reduce your salary to £48,714. You would have three more hours to spend with your children (potentially reducing your childcare costs). You would have lost more than £6,000 in taxable income but you would have kept your child benefit. You may feel this is a better deal overall.
2) Boost your pension
Say your salary is just above the income limit of £50,000 and you have two children. One simple way to bring yourself below it is to increase contributions into a company occupational pension by means of an additional voluntary contribution. For example, if you earn £50,500 and pay £1,500 into a pension in order to get below the income level, you are only 'surrendering' £900 of real income, after higher-rate income tax relief. In other words, you would have been taxed £600 on the original £1,500 if you had kept it. This way, you have an extra £1,500 a year in your pension. Moreover, you also keep the child benefit of £1,700.
3) Salary sacrifice via childcare vouchers
Childcare vouchers are a government scheme aimed at helping working parents. Childcare voucher schemes normally work through salary sacrifice, which means parents can opt to receive childcare vouchers to pay for childcare instead of part of their salary.
Salary sacrifice is a contractual arrangement whereby an employee gives up the right to receive part of their cash remuneration, usually in return for their employer's agreement to provide some form of non-cash benefit – in this case, childcare vouchers.
Because you don't pay tax or National Insurance on childcare vouchers, you can save substantial sums each year depending on your tax band and when you started in the scheme (see table), with the potential to reduce your salary enough to retain child benefit.
Savings available from taking maximum amount of Childcare Vouchers
| Status | Annual tax exempt amount | Savings |
| Basic rate (contracted out) 20% tax 10.4% NI | £2,916 | £886 |
| Basic rate (contracted in) 20% tax 12% NI | £2,916 | £933 |
| Higher rate in the scheme before 6 April 2011 40% tax 2% NI | £2,916 | £1,225 |
| Additional rate in the scheme before 6 April 2011 50% tax 2% NI | £2,916 | £1,516 |
| Higher rate category 40% tax 2% NI | £1,484 | £623 |
| Additional rate category 50% tax 2% NI | £1,166 | £606 |
Source: www.childcarevouchers.co.uk
3) Structure your income
For self-employed and business owner parents salary sacrifice is not an option. However, you may have the opportunity to vary your income to bring it under the income threshold for child benefits.
For example, you may be able to 'tweak' your annual profits so they do not exceed the income threshold. Keep them below the £50,000 level for a few years and then make yourself one large payment. You'll lose child benefit that year but not in the others.
