HMRC launched a campaign on 10 March encouraging parents affected by the new child benefit tax charge to ‘opt-out’ of the benefit. This may mean they don’t have to complete a tax return for the 2013/14 and future tax years. It is not intended to discourage parents from claiming child benefit as this could have the unintended consequence of losing out on State pension.
The new child benefit tax rules kicked-in on 7 January, affecting over a million taxpayers. Many will already be faced with completing a tax return for the first time for the 2012/13 tax year. And HMRC need to gear-up to process these returns.
The tax charge can be avoided. For example, paying into a pension to reduce taxable income can wipe out the tax – effectively supercharging the pension tax relief.
Others may be best advised to stop receiving the benefit payments, to remove the tax return hassle. Payments can be stopped online using the HMRC form. This is different from not claiming child benefit. Claims must still be made to avoid the State pension trap:
- Non-working parents caring for a child under 12 qualify for State pension credits through their Child Benefit claim.
- Not claiming stops the credits – potentially leaving mum short on State pension. This shortfall could be made up by making voluntary NI payments, but at a cost of over £50 every month.
- However, making the claim, but asking for it not to be physically paid, can give the best of both worlds – continued build-up of State pension without the extra tax return paperwork.
It’s a subtle, but important, difference that could really affect a family’s overall wealth in retirement.
If you would like more information on tax planning opportunities centred on your personal circumstances, please contact us >>