If you have employees who are responsible for children/young adults earning around £50,000, any additional taxable income that they receive (such as a bonus for example) could result in them having to pay a child benefit tax charge.
What is Child Benefit?
Child benefit is a State benefit paid out for people who are responsible for a child under 16 (or 20 if they stay in approved education or training). It is usually paid every 4 weeks. Like other benefits, the amount paid is reviewed each year – for the 2022/23 tax year, the benefit is £21.80 per week for the first or only child, and £14.45 per week for additional children after that. To get an increase of take-home pay of that level, someone would need to achieve a pay rise of £2,840.45 (after Tax and National Insurance are taken into account – someone paying back a Student Loan would need to earn even more).
Who is Eligible – and is it taxable?
Eligibility is quite straightforward – you are eligible if you and your partner both earn less than £50,000 to receive the benefit in full. The benefit if you earn under £50,000 is not taxable.
If your pay is between £50,000 and £60,000, you are eligible but could be subject to a child benefit tax charge.
If you or your partner earn over £60,000, you are not eligible for the benefit at all.
Is there anything people can do which would benefit them?
Yes. For example, if someone earns £50,000 and currently claims child benefit, then they receive a £5,000 bonus, it could be better for them to exchange it for a single employer pension contribution. We call this “Bonus Exchange”
If they took that £5,000 as a cash payment, most of it would be subject to higher rate tax, and of course National Insurance. Together with the Child Benefit tax charge they would now have to pay, that £5,000 would shrink to £1,922.49 (2022/23)! Should they agree to a “Bonus Exchange they would see £5,000 paid into their workplace pension, subject to limits on tax-free contributions, and not need to pay a Child Benefit tax charge either.