The Child Benefit trap and how to avoid it

Subscribe

We've seen high levels of inflation over the past couple of years and also higher wages as a result, which means we've heard the term 'fiscal drag' being used quite frequently. Income tax thresholds have not been increasing at the same rate, meaning that more and more people will be pushed into higher tax brackets. Not only does this mean more tax to pay, but there are wider implications, particularly for parents earning more than £60,000 who are in receipt of Child Benefit.

Child Benefit and earnings over £60,000

The longstanding High Income Child Benefit Charge (HICBC) threshold of £50,000 will increase to £60,000 from 6 April 2024 with the charge being tapered between £60,000 and £80,000, the point where Child Benefit is entirely removed. Previously, 1% of Child Benefit was lost for every £100 of income over £50,000. Child Benefit will now be removed at a slower rate of 1% for every £200 over the new threshold. These changes, announced in the Spring Budget, are expected to remove tens of thousands of households from paying the charge.

From April 2026, the Government has said it will move to a household basis for assessing income but until then if either you are your partner earn more than £60,000 a year before tax, you’ll have to pay back some (or all) of your Child Benefit as extra income tax.

How much tax will you pay on Child Benefit if you earn over £60,000?

For every £200 of income above £60,000, 1% of the Child Benefit amount needs to be paid as HICBC via a self-assessment tax return. You can work out how much tax will become due by using the Government’s calculator: https://www.gov.uk/child-benefit-tax-calculator/main. If your income exceeds £80,000 then the charge will be equal to the payments received, however, it can still be beneficial to claim Child Benefit.  

What happens if you opt not to receive Child Benefit?

You could choose not to receive the Child Benefit, thereby avoiding the payment of extra tax, however, you are encouraged to complete the Child Benefit claim form in any event, as this will mean you continue to accrue National Insurance (NI) credits. This is particularly important to those who have stopped working to look after children, as the amount of State Pension you’ll receive is dependent on your NI record, for which you now need a minimum of 10 qualifying years to receive anything from the state, and 35 years to qualify for the full State Pension. Essentially, this means it is important to still ‘claim’ the benefit, even if there is no monetary value, and you can still elect not to receive the actual payment. 

Using salary sacrifice to reduce your tax liability

There is a way to avoid the extra tax, which means reducing your taxable income. This doesn’t mean getting a lower-paid job or even asking to reduce your hours and pay, but simply by making a pension contribution, opting to sacrifice salary for childcare vouchers (if your employer supports them), or making charitable donations. 

Contributing to a pension to reduce your income

Pension payments taken from income before you pay tax have the effect of reducing your taxable income, so if you reduce your income to less than £60,000 (after all allowances) there will be no HICBC to pay. Additionally, pension contributions for those with this level of earnings will attract tax relief at 40% with 20% of the payment being reclaimed via self-assessment. 

Pension contribution example

Someone with an income of £63,000 could make a pension contribution of £2,400 from their pre-tax income. This would be increased to £3,000 when 20% basic rate tax relief is added, meaning their income level would fall from £63,000 to £60,000 thereby avoiding the HICBC. Additionally, as a higher rate taxpayer, extra tax relief could be claimed via self-assessment, meaning the actual pension payment has only cost the individual £1,800 for the £3,000 being saved into the pension arrangement.