‘I earn more than £60k a year – can I avoid the child benefit charge?’

“I’m a working parent earning more than £60,000. At the moment I have to file a tax return each year to pay back some of the child benefit I receive. I’ve heard I can avoid the high income child benefit charge by increasing my workplace pension contributions. Is this true?”

From April 2024 child benefit is worth £25.60 a week for your first child and £16.95 a week for any subsequent children.

It used to be a universal benefit, meaning all parents could get it. However, in 2013 it was changed so that families where one parent earned more than £50,000 started to lose some of their entitlement. Once they earned £60,000, they were entitled to nothing.

You had to pay back 1% of every £100 earned above £50,000 to HMRC at the end of every tax year. If you earned more than £60,000 you, you had to repay all of it. This is called the high-income child benefit charge (HICBC).

Confusingly, though, if both partners earned below £50,000, neither had to repay anything back. That’s because the cap was based on the highest earner’s salary rather than the family income.

However, child benefit rules are set to change from April 2024 after a number of announcements in the spring budget.

• the HICBC will be assessed on a household basis by April 2026
• in the meantime, the threshold to start paying back child benefit will increase in April from £50,000 to £60,000 – as a result 170,000 families will stop paying the charge this year
• the upper threshold will become £80,000, providing an estimated £1,260 boost on average for around half a million households

It means if you earn up to £60,000 a year, you will be able to receive child benefit in full from April.

You say you earn more than this: this means you will lose 1% for every £200 you earn over £60,000 right up to £80,000.

Depending on your annual salary, you could lower the amount you need to repay or eliminate the HICBC altogether by increasing your workplace pension contributions.

This is because the government looks at your ‘adjusted net income’ which basically means your income after your pension contributions have been deducted, when calculating how much you need to repay.

However, be aware that any increase in pension contributions would mean a drop in your monthly take-home pay, so you’ll need to work out whether you will still be able to afford your outgoings if this changes.

You will also have to check the type of pension your employer offers. Not all pensions are salary sacrifice which means your income comes down when you pay more into your pension. If it’s not an option, you could pay into a private pension instead – the tax-free limit is £60,000 a year and this can be backdated up to three years.

You can play around with the government’s child benefit tax calculator to see how much you might have to pay.

So how does it work?

If you or your partner earn above £60,000 and want to reduce the amount of child benefit you have to pay back, you need to try to reduce your net pay – the amount you take home – to a level below £60,000 or as close to this as possible.

Your workplace pension is a good place to put this money instead, because any extra money you pay into this gets invested into your future. Pension contributions also benefit from 20% tax relief, plus compound interest on top, so any extra top-ups are likely to be worth a lot more by the time you retire. In other words, you won’t lose out.

In some cases, you may even make a third saving by dodging 40% income tax on that extra salary.

For example, if you earn £62,000 a year and you set your workplace pension contributions to 5%, you will put £3,100 into your pension, meaning your net adjusted pay will fall to £58,900. Assuming you have one child and are receiving £1,331.20 per year in child benefit, you would save £133 on repayments as you would no longer be liable for HICBC.

If you earn £64,000 and pay 5% into your workplace pension (£3,200 a year), you would be liable for the charge on £800 of your salary. By increasing your pension contributions by an additional £800, you’d make yourself exempt entirely as your take-home salary would fall to £60,000. You would keep £266 in child benefit.

Similarly, a parent earning £65,000 who is already paying 5% of their income (£3,250) into their workplace pension could contribute a further £1,750 to keep their adjusted net income at £60,000. As a result, they would keep £332 in child benefit.

It’s a relatively small saving but if you are planning to top up your contributions anyway then its an extra incentive.

If you are closer to the £70,000 mark, the top-up would be significantly higher, but in the long-run, you would still be better off.

If you earn £68,000 for example, and boosted your 5% contributions to bring you down to £60,000, you would increase the amount of child benefit you keep hold of by £306 a year.

This £8,000 contribution may seem like a lot compared to a 5% pension contribution which would be £3,400.

However, it actually equates to a much bigger saving.

Helen Morrisey at Hargreaves Lansdown explains: “If you factor pension tax relief into this then the actual cost to yourself of making this contribution is not £8,000 as you would get 20% tax relief through your employer as well as claiming a further 20% tax relief through self-assessment. That’s a saving of £3,200 overall.

“Looking at it this way your £8,000 pension contribution has actually cost you just under £3,900.”

Are there any other ways I can avoid having to pay some of the child benefit back? 

There are other ways you can lower your net adjusted pay too. You could also use a salary sacrifice scheme such as a gym membership or cycle to work. Speak to your employer to find out what schemes you are eligible for.