Lower 40% tax bracket and child benefit

[CadleCrap]

Can anyone answer me? Please excuse approx figures.

Child benefit is due to stop in 2012(?) for those on the 40% tax bracket, currently £44k. I believe that the 40% bracket is going to be lowered to £39k at some point. Does that mean CB will stop if you earn £39k?

I believe so but am not an expert.

Are we taking into account personal allowances and pension contributions?

Will stop (allegedly) 2013. Add PA to income taxed at 20%, and there you have the gross figure you can earn before hitting 40%

poorbuthappy No idea, I thgought the idea of aligning it with tax bracket was to reduce the cost of admin so including pensions wouldn't do that

grumpypants but that is £44k for most people isn't it? Due to go down to £39k?

I don't think PA or pensions contributions matter in this: if someone in your household hits HRT threshold, they intend to claw CB back.

They've still said nothing clear about NI credits for those with "qualifying" children. And wherever the threshold, the basic unfairness of eg £38k x 2, keep benefit, £40k x 1, lose it, remains.

Personal allowance 2011/12 is £7475. 40% tax payable once taxable income reaches £35001, so at £42476 if not contributing to pension. Pension contributions are non-taxable, so you can add these on.

If you are right on the cusp, it is worth considering increasing your pension contributions to avoid the 40% tax contribution.

Yes, currently there has been no suggestion that pension contributions will not be taken into account when assessing the right to child benefit. It may be a loophole that they close, we'll have to wait and see.

somerset you sound like you know what you're talking about! are there any other good reasons why you'd do that? (as you only pay 40 per cent on the income over the limit obv)

Is the HTR due to reduce? I'm asking because I'm on the cusp and should be in line for a 2% pay rise which I might have to refuse (!) as my income would reduce quite considerably with CB for 2 kids. (I know I am planning WAY ahead).

If HTR does reduce then I might have to find a slightly lower paying job which is just bloody stupid.

AllTheYoungDoods it will all depend on your personal circumstances but, if, for example, increasing your pension contributions by 1% means that you cease to be a 40% tax payer, it could be worth it depending on how this affects your overall earnings.

I haven't worked it out properly yet, but a 1% pension contribution on a £44000 salary is £440 per year. The 20% extra tax you would pay on £2000 worth of earnings is £400 per year, so a very similar figure. There must be an earnings point at which it makes better financial sense to increase your pension contribution and get all the added benefits associated with the increase, rather than lose it anyhow in income tax.

Hope this makes sense

I'd welcome any further explanation of the pensions contribution bit, as I'd thought it wouldn't count.

If you're a basic rate tax payer, then then pensions provider gets the tax back and adds it to your account automatically. If HRT, then you have to do it via a tax return, and you get tax relief at whatever rate is applicable. It doesn't reduce your taxable income though, does it? It's a relief of tax, and I thought those weren't the same.

Anyone got the authoritative position?

your lower rate tax band is increased by the gross amount of your pension contributions, thereby increasing the level at which you would begin to pay HRT.

so HRT on > £35k
pension contribution of £5k
means HRT then applies to you on taxable income (after pa) of £40k

Pension contributions are deducted from your salary before taxable pay is calculated.

E.g. Salary £45000, pension contributions £5000, taxable income = £40000

NI remains payable though (according to this HMRC page), so it may not be that clear cut as the tax/NI merger consultation works through.

Presumably the self-employed and those with non-occupational pension plans (who may have to claim via tax form) end up in the same position?

(I think I'm getting current procedures muddled up with an imperfect recollection if MIRAS. Apologies for being slow on the uptake).

yes, NI remains payable.
A potential way round this is to agree with your employer that you sacrifice a portion of your salary and they make pension contributions on your behalf. If this happens you are no longer entitled to that salary, and so are not taxed or NI'd on it - it is no longer part of your income.

The issues with this can be

• that you have sacrificed your right to that salary, and can't necessarily just change it back
• your future pay increases may then be based on the new, reduced, salary so you may lose out in overall terms (this is what happens at my work)

As a plus, your employer no longer suffers employers NI on that sacrificed element either, and may agree to pass on some of this benefit to you (CS laughs hollowly at the though of working for such an employer)

This doesn't come in for two years, and the detail is yet to be worked out. A number of pension providers have been trying to sell their products as a way of avoiding the change. It is just sales talk, I wouldn't worry about it for at least 18 months and certainly don't make any changes (unless they make sense for other reasons).

There may also be a (tiny?) number of people for whom it may worth reducing their hours or taking unpaid parental leave to keep them just the right side of the line but for now we just don't know.