Families affected by the government’s announcement to scrap child benefit where at least one parent earns more than £44,000 could still qualify for the benefit if they pay more into their pension.
According to Towers Watson, someone earning just over the higher-rate tax threshold can take themselves out of the higher-rate tax bracket by increasing their pension contributions, meaning they remain eligible for child benefit payments potentially worth thousands of pounds a year.
Child benefit is set to be axed in 2013 for families where at least one parent is a higher-rate taxpayer.
Paul Macro, a senior consultant at Towers Watson, says: "From 2013, some families could find that putting more money aside for retirement increases the cash in their pocket as well as their pension fund. The costs of raising children can prevent parents paying as much into their pensions as they feel they should. For some, it may now be a question of whether they can afford not to save more."
Child benefit is paid at a rate of £20.30 per week for the first child and £13.40 a week for each subsequent child; these rates have been frozen for the next three years.
Towers Watson gives the example of a couple that has three children under 16. This means their child benefit will be £2,449 a year if they qualify for it.
One partner earns £47,500 and has no other taxable income. The other either does not work or earns less than the higher-rate threshold.
Currently, the higher earner pays 5% of their salary into an occupational pension, on top of the contributions that their employer makes for them. This £2,375 employee contribution reduces the salary assessed for income tax to £45,125.
This amount is £1,250 above the higher-rate threshold making the parent a higher-rate taxpayer and disqualifying the family for child benefit from 2013.
However, the employee could choose to increase the contributions they make to their pension, paying in an extra £1,250.
If taken as income, this £1,250 would be taxed at 40%. So paying it into a pension reduces the employee’s take-home pay by £750.
However, it also means they are no longer liable for higher-rate tax on any of their income and the family would now qualify for £2,449 of child benefit.
Overall, the employee could therefore boost their pension fund by £1,250 and their family’s disposable income by £1,699.
Macro comments: "It is only the least well off of the ‘child benefit losers’ who can easily take themselves out of the higher-rate tax bracket, and the government would probably accept that a few hundred pounds of extra taxable income should not make families thousands of pounds worse off. So it might not regard increasing pension contributions to preserve child benefit as an affront to the idea that 'we’re all in this together'.
"If the whole child benefit payment is withheld from all higher-rate taxpayers, employers will also need to be conscious that a small routine pay rise could inadvertently leave some employees worse off."