Contractor Tax Planning for Parents: The Child Benefit

Who can receive the Child Benefit?

The Child Benefit is available to parents or guardians of children who are under the age of 16, or under 20 if they’re in approved full-time education, such as A-levels, or training.

How much is the allowance?

There are two rates of child benefit that you could receive as illustrated in the table below:

These rates are valid for the 2017/18 tax year.

What are the limitations of the Child Benefit?

If you or your partner is earning over £50,000 per year, you would have to pay back some of the benefit you receive in what’s known as the High Income Child Benefit Charge. This is calculated individually, not based on your combined household income, as only one person can get Child Benefit for a child.

For example, if you earn £49,000 per year and your partner earns £30,000 per year, you can receive Child Benefit without having to pay anything back, even though your household income is £79,000 per year.

However, if one of you earns over £50,000 per year, you will have to pay back a percentage of the overall benefit received for your children; 10% of the benefit is deducted for every £1000 earned over £50,000.

For example, your partner earns £30,000 per year and you earn £56,000 per year, and you receive £1076 per year in Child Benefit (£20.70 x 52 weeks). To work out how much of the Child Benefit you’d have to pay back, subtract the threshold of £50,000 from your total taxable income for the year; divide this by 100, and multiply the result by the amount of benefit you receive divided by 100. See below:

Income of £56,000 – £50,000 threshold = £6,000 / 100 = 60 x 10.76 (child benefit amount divided by 100: £1076 / 100 = £10.76) = £645.60 to pay back to HMRC.

If you or your partner earns over £50,000 per year but below £60,000, you could still receive the benefit but the higher earner must repay the calculated amount back at self-assessment filing.

When yours or your partner’s yearly income reaches £60,000 or more, the person who earns more would have to repay all of the Child Benefit received.

Can I claim Child Benefit without paying the Charge?

You can claim Child Benefit and choose not to receive payments. This can be beneficial in that you can receive National Insurance credits towards your State Pension entitlement, whilst ensuring that your child automatically receives a National Insurance number before his or her 16^th birthday.

I am a contractor with my own limited company – what are my options?

With efficient tax planning, you can make the Child Benefit work for you if you are a parent and a director of your own limited company.

The High Income Child Benefit Charge is calculated based on gross personal earnings, which includes dividends, but you have a few options in order to reduce the amount of Child Benefit lost if you earn over £50,000 per year.

There are several other options you have as a limited company director to avoid repaying a portion of your Child Benefit:

• Retain earnings in your limited company and limit your withdrawals and distributions to less than £50,000.
• Make company pension contributions that will ultimately reduce your personal profit to below £50,000.

Contact us for more tax planning techniques for limited company directors.

I work through an umbrella company – what are my options?

Even though you may not have access to the same tax planning options as limited company directors, there are still ways to be able to benefit from this allowance without tax implications. Contact us to find out your options.

Read more about the benefits of contracting through an umbrella company.

What is the benefit of tax planning in order to receive Child Benefit payments without paying the High Income Child Benefit Charge?

The tax charge for higher earners could negatively impact some families more than others, as it does not take into account household income.

For example, if the two parents in the household are each earning £49,999, one will be able to receive the Child Benefit without having to repay any amount back to HMRC – whilst living in a two-income household.

However, if you are the director of a limited company or an umbrella company contractor earning £50,000 or more per year and your spouse is a stay-at-home parent with no income, then you will have to repay some of the Child Benefit even though you live in a single-income household.

If the latter applies to you and your family, the benefits of tax planning are great as it could enable you to receive an allowance towards the cost of raising your children.

Contact us for more information on tax planning as a contractor or freelancer.