The new year isn't off to the best of starts for over a million families who have now lost, or had their entitlement to Child Benefit reduced, under the welfare shake-up. But if you are among those affected and can no longer rely on full Child Benefit, worth an average of £1,300 a year, there are ways to combat the loss.
"The Child Benefit changes look like they are causing havoc," says Jason Holland of independent financial adviser Bestinvest. "However, there are a number of ways you can utilise tax allowances which have statutory incentives to offset some of the hit."
The benefit is a big help to many families, fixed until April 2014 at £20.30 per week (£1,056 a year) for the oldest or only child, £13.40 for each additional child and £15.55 per child for guardians. However, eligibility is now means-tested, based on all taxable net income which includes your salary, any rental income, investments and bonuses.
For households in which one or both parents earn more than £50,000 a year, HM Revenue & Customs should have written to explain the changes which came into play last Monday, although some will still be in the dark as entitlement now depends on income for the whole tax year running from April to April.
Combined incomes are irrelevant – it's all about how much you earn parents earn individually – if one earns more than £50,000 you will receive a reduced amount, while earning more than £60,000 will effectively mean you lose Child Benefit completely. This could mean that two parents each earning £50,000 will still get the full benefit, while a family with one parent earning £60,001 and another out of work, get nothing.
Further complications arise as HMRC isn't simply taking this money away. Instead, many families will continue to receive the benefit but will have to pay more tax. This will leave 500,000 people facing the dreaded self-assessment tax form and having to pay 1 per cent extra in income tax for every £100 they earn over £50,000. So, if you earn £54,000 and claim £1,752 in Child Benefit for two children, you will have to give back 40 per cent (£700).
If you earn more than the threshold you can stop the benefit immediately by filling in a form on the HMRC website. But while it may be tempting to avoid the bureaucracy of paying additional tax, financially speaking, it makes sense to continuing claiming.
For self-employed parents, or those without a fixed income, it is best to keep receiving Child Benefit in case you don't earn over the threshold in the year. But, even if you know that you will have to give some or all of it back, this money can still be put to good use before you hand it over.
For example, you could put it into a high-interest cash ISA (individual savings account), or Junior ISA to benefit from tax-free savings. Premium bonds are another option for small monthly savings with any winnings tax-free and access to the money as and when you please.
Regular savings accounts aren't tax-free but they do have attractive rates (Cheshire Building Society pays 5 per cent for its branch-based Platinum Saver) and although you are restricted as to how much you can save, they are useful for short-term saving. Halifax also offers a regular saver for children, paying 6 per cent on monthly payments of between £10 and £100 – use a tax R85 form so your child can use their personal tax-free allowance.
If you are fairly close to the £50,000 threshold, reducing your income to bring you under the limit in the eyes of the taxman is another option. This usually boils down to either making pension contributions, or any form of salary sacrifice.
With the former, putting a few extra thousand into your pension every year will not only reduce your income tax bill and help towards retirement, but could also decrease your income to below the £50,000 Child Benefit threshold.
Similarly with a salary sacrifice scheme, you can choose to replace some of your pre-tax earnings with non-taxable benefits such as childcare vouchers, to reduce your salary. "Those not already taking childcare vouchers are losing out and should speak to their employer," says John Woodward from Busy Bees Group.
Higher-rate taxpayers can sacrifice up to £124 a month in exchange for vouchers which must be used to pay for registered childcare. These vouchers are exempt from National Insurance and income tax, saving up to £624 a year. If your employer doesn't offer such a scheme you can ask it to provide one (make sure it knows it will cut its NI contributions).
Other salary sacrifice benefits such as cycle to work and car leasing schemes could help in the same way.
You should also look into transferring assets if your partner earns less than you. If your partner doesn't work at all, you could move a hefty chunk of your taxable income and use their annual personal allowance instead (currently £8,105 and set to rise next year to £9,205), although this does mean that you are legally passing all ownership to them.
"One of the easiest ways to make your household more tax efficient if you are married or have a civil partner in a lower tax band (or non-taxpayer) is to consider transferring savings and investments to them as this can be done without incurring capital gains," says Mr Holland.
If all these tweaks can't bring your income down enough, the best advice is to take steps to minimise the impact of losing Child Benefit. Once you've maximised tax-free allowances for you and your spouse (currently £11,280 a year for stocks and shares ISAs of which up to £5,640 can used in a cash ISA), take a hard look at your household bills to see where you can cut costs.
Andrew Hagger of Moneynet says cancelling non-essentials such as gym and club memberships, dental plans and magazine subscriptions will help to rebalance your budget. He also recommends taking bigger steps including moving your mortgage to a more competitive fixed-rate deal and cutting overdraft costs. He adds: "Gas and electricity prices are getting more expensive, but you can save more than £300 a year by switching."
Changes at a glance
Households where one parent earns more than £50,000
If one parent earns more than £60,000, you will lose the benefit completely. Those earning between £50,000 and £60,000 will only be eligible for reduced Child Benefit. This is expected to affect over a million families, losing an average of around £1,300 a year.
You can still opt out and stop receiving Child Benefit immediately, although if you missed the 7 January deadline you will need to register for self-assessment (by October) and fill in a self-assessment form (by 31 January 2014) to repay any benefit you have received.
If you continue to receive Child Benefit you will have to repay all or some of the money via the tax system, filing a self-assessment tax return each year to repay the money either as a lump sum, or in instalments via the PAYE system.
New parents can opt out but should still complete the Child Benefit form as this may affect state pension entitlement.
Find out more at hmrc.gov.uk/childbenefitcharge.