Act now to cushion child benefit blow

Offset losses by planning ahead and checking all options, say Chiara Cavaglieri and Julian Knight
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The Independent Online

It's sent many in middle Britain and the right-wing press into a state of furious indignation against the coalition government.

The decision to save £1bn a year by withdrawing child benefit from families with a higher rate taxpayer from 2013 would certainly be described in the loaded double-speak of Yes Minister as "courageous". But what does it actually mean for you, and, if you're affected, what steps can you take right now to cushion the blow?

At first glance the Chancellor's announcement last week seems to narrow the options for parents. The move will affect 1.2 million households currently qualifying for the benefit, which is worth over £1,700 a year for families with two children. Any home with one person earning more than £43,875 will lose their benefit. This has led to criticism of inequality as households made up of two basic-rate earners will keep their payments, despite potentially earning almost twice this figure.

"Since the announcement, we have seen hints at a future concession to solve this potential unfairness, with the introduction of transferable tax allowances for married couples. In the meantime, some families are going to have to simply accept that child benefit is being cut," says Martin Bamford, of independent financial adviser (IFA) Informed Choice.

Child benefit is currently worth £20.30 a week for the first child and £13.40 a week for any other children, paid until the child is 16, or 19 if in full-time education. After the cut, higher-rate taxpayers will either have to stop claiming it or have the same amount deducted in taxes.

These cuts are yet another blow to parents who face the demise of Child Trust Funds (CTFs) and reduced eligibility for child tax credits next year. The baby element of child tax credit, worth £545, will also be axed, so with all these changes, parents will need to get clever with any other financial help available.

First, parents issued with a voucher before the CTF scheme is given the chop in January 2011 will still be able to open an account (either cash or shares) and top it up by up to £1,200 a year, tax-free. This is worth £500 (in two £250 instalments) for children born before 1 August 2010, but only £50 for those born after. Parents who were paid Disability Living Allowance (DLA) for their child from 6 April 2009 will also get an extra yearly CTF payment of up to £200.

Similarly, although child tax credits will be reduced for families earning over £40,000 next year, and as low as £25,000 in 2012, it is still worth investigating. At present, households with a combined income of up to £58,000 are still able to claim for the family element up to £545 a year, a child element up to £2,300 and a single payment of £545 for children under one. Parents with a disabled child can also claim an extra payment worth £2,715.

There are several other benefits which are not reliant on a low income, including 15 hours of free nursery education for all three and four year olds for 38 weeks of the year, and free school transport. Widowed parents may also be eligible for a tax-free bereavement payment of £2,000. Women can also claim for statutory maternity pay as long as they've been with the same employer for at least 26 weeks once they reach 15 weeks before their due date. This is paid for 39 weeks with 90 per cent of their average gross weekly earnings paid for the first six weeks, then for either the same rate is paid or £124.88, whichever is lower. Paternity pay is also available, but only for two weeks.

Another way that high earning families can cut costs is with childcare vouchers. These allow working parents to take some of their pay as vouchers used to cover nursery, or other childcare costs, without having to pay tax on the first £55 per week or £243 per month. These could also be a clever way to bring some parents below the 40 per cent tax band, so that they continue to receive child benefit – a worker could reduce their taxable salary by up to £2,916 if they took full advantage of the tax breaks available. By April of next year the tax relief available is set to fall to just £28 per week for 40 per cent taxpayers, but parents who join a scheme before this date will not be affected.

"If you're not taking childcare vouchers my strong advice would be to do so before 6 April," says Simon Moore, of Computershare Voucher Services.

Some parents will also have enough time to cushion the blow themselves. With three years until child benefit stops for families with a high earner, those that don't rely on it to cover immediate costs can use payments to build up a small savings pot that will in effect negate the loss from 2013. And, as long as debt isn't an issue (this should always be paid off first) there are various investment options open to parents. For the short term, an individual savings account (ISA) is a great place to start and offers significant tax breaks.

"Investing in the stock market is not a good idea for less than a five-year term, so the best choice is to stick to a cash ISA. The limit is £5,100 per year and so the child benefit could be topped up from other income or capital to fully use the allowance," says Danny Cox, from IFA Hargreaves Lansdown.

Otherwise, parents with an active CTF can ensure they use up their £1,200 yearly allowance and may want to consider investing into a pension to benefit from tax relief on the contributions. As with childcare-voucher salary sacrifice, pension contributions could also help to keep some parents under the upper tax limit.

"For example," says Mr Cox, "John has gross income £1,000 above the higher rate tax band and three children. Child benefit is currently a tax-free £1,056 per year for the first child and £697 for each further child. John pays an £800 net SIPP [self-invested personal pension] contribution (which costs him £600 after self-assessment reclaim) to reinstate child benefit of £2,450 and which gives him a £1,000 pension pot."

Expert View

Danny Cox, Hargreaves Lansdown

"Parents due to lose the child benefit have three years to plan and adjust their finances accordingly. If they are able to do so now, saving the child benefit could provide additional money in three years which could help cover emergency expenses, childcare or school fees."

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