High earners urged to increase pension contributions to pay less tax

An independent financial adviser has urged high earning parents to increase their pension contributions to avoid being taxed on their child benefits.

LEBC’s director of public policy, Kay Ingram, has said that parents whose income is near one of the “cliff edges” of the income tax regime need to be aware of the implications of the High-Income Child Benefit Charge (HICBC).

The benefit is tax-free unless a parent or their partner has taxable income of more than £50,099 a year. If the highest earner in a couple earns between £50,000 and £60,000 then the HICBC gradually taxes child benefit.

Once income is over £60,000, then child benefit is taxed at 100 percent.

To avoid being taxed by the HICBC, Ingram says that parents should put more money into their pension savings, or into charitable contributions.

The deadline to receive a tax code adjustment from HMRC for those hit by the HICBC in the 2018-19 tax year is Friday 5 October.

“Many parents waive child benefit to avoid getting involved in self -assessment, but if income is nearer to the lower threshold and there is more than one child, this could mean giving up income which is still partially tax free, so reassessing this decision is advisable especially if income varies from year to year,” explains Ingram.

Ingram says that high earners should also be aware that paying extra pension contributions will allow them to recoup further tax exemption allowances. “Where income is between £100,000 and £125,000 the personal income tax free allowance of £12,500 is gradually withdrawn, at a rate of £1 for every £2 income over £100,000,” she writes.

“Those with fluctuating income around these levels may need to complete a self -assessment return to make a claim for a refund or pay the extra.

"Paying pension contributions or making charitable gift aid donations can help restore the personal allowance and reduce the tax payable.”

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