How to beat the child benefit cuts
More than one million people face losing child benefit or seeing it reduced under a shake-up of the rules determining eligibility. For many families this will result in a squeeze on their finances. But by following this advice, you may be able to beat the child benefit cuts.
Under the new system, which came into effect on 7 January 2013, any family where one earner takes home more than £60,000 a year will lose all of their child benefit. Families where the household's highest earner takes home more than £50,000 a year, but less than £60,000, will lose part of the benefit.
Higher-earning families with two children stand to lose up to £1,750 a year as a result of the changes, while families with three children will lose nearly £2,500.
The government gave families the choice either to opt out of child benefit by 6 January or to continue receiving it and then pay it back at a later date. Depending on your decision, see what steps you can take to minimise the hit on your household finances.
If you have chosen to continue receiving child benefit
If you have chosen to keep receiving your child benefit, then you will have to fill in a self-assessment tax return by 31 January 2014 and you will have to pay back some or all of your payments if your earnings exceed £50,000.
But you may be able to hang on to your child benefit payments if you are able to reduce your taxable earnings over the year by using 'salary sacrifice' schemes. Salary sacrifice happens when an employee gives up the right to part of their salary in return for certain benefits.
For example, you may be able to use some of your salary to buy childcare vouchers, medical insurance or to lease a car, with the purpose of bringing your income below the £50,000 threshold. Currently, higher-rate taxpayers can sacrifice £124 a month or £1,488 a year to buy childcare vouchers free of tax and National Insurance (NI).
Another option is to consider upping contributions into your workplace pension. So, for example, someone earning £53,000, who would stand to lose some of their child benefit, may want to consider making a £4,000 gross contribution into their workplace pension to bring their income down to £49,000, so that they can continue to receive the benefit in full.
The advantage of reducing your income by investing in your pension is that pension contributions are entitled to tax relief. If, for example, you are a higher-rate taxpayer paying tax at 40% and you pay £10,000 into your pension, the total cost to you after tax relief is only £6,000.
Remember that you won't normally be able to access your pension funds before the age of 55 at the earliest, so you must be certain you can afford to put away this money for the long term.
If you aren't able to beat the child benefit changes, then make sure you don't spend any benefit you receive as it will have to be repaid by 31 January next year.
If you think you might be tempted to spend the money, set up a standing order so that it goes straight into a savings account each month. That way you will earn interest on your the benefit over the year, which you will be able to keep, even though you have to hand the benefit payments themselves back.
If you've chosen to stop child benefit payments
If you have chosen to have your child benefit payments stopped, then you will have to think about ways in which you can make savings elsewhere to help compensate for the loss of these payments.
Start by sitting down and writing a list of all your outgoings - this will help you to identify where you can cut costs. Your biggest monthly outgoing is likely to be your mortgage or rent, and, while there might be little you can do to reduce this cost, homeowners should check whether they can make savings by remortgaging.
For example, the current average mortgage standard variable rate is 4.33%, whereas ING Direct is offering a two-year tracker mortgage rate of just 2.49%. Over a year, someone with a £150,000 repayment mortgage would save £794 on the ING Direct rate, assuming it remains the same, even once the £1,945 fee for this deal is factored in.
As well as reviewing your mortgage, you should also check you're earning as much interest as possible on your savings. For example, if you had £5,000 in the average easy-access savings account, paying an annual equivalent rate (AER) just 0.27%, you'd earn a paltry £13.50 in interest over the year before tax.
Bu if you held the same balance in the current market-leading easy access account, West Bromwich Building Society's WeBSave Plus 3 account, you'd earn £115 in interest before tax. The West Brom account pays 2.30% AER and can be opened with £1,000. This account only allows one withdrawal a year.
Make sure you review your energy bills too. If you haven't switched tariffs recently, compare costs and see if you can make savings by moving. Around 60% of households have never changed their energy price plan and as a result are paying about £200 a year more than they need to on average.
Use a comparison site, such as MoneySupermarket to find out how much you could save.
Being energy efficient can also help to bring household bills down. For example, the Energy Saving Trust says turning appliances off at the plug when not in use and avoiding standby saves an average £35 a year on energy bills.
Similarly, turning down your thermostat if it is set too high will save around £60 a year on heating bills, while washing clothes at 30°C rather than higher temperatures will save around £12 a year on energy bills.
The content on this page is supplied by MoneySupermarket.com