Child Benefit Charge Reduction

With the cost of living crisis, it may be that increased pension contributions are just not possible for you right now, even if they are very tax efficient. Here at Milk&Money, we are passionate about helping people save for their futures, but we also understand that it may just not be possible for you right now.

The high income child benefit charge is advertised as hitting those households where the highest earner is earning £60,000 per year, despite the fact that even with pension contributions of just 1%, your adjusted net income would already be £600 lower, leading to an adjusted net income of £59,400. The average pension contribution is higher than this. If you make contributions of more like 5%, then you won't be liable for the high income child benefit charge until an income of £63,200 or so. 

Many people have a rough idea of what Income Tax rates are, and where the bands for the different rates are, but fewer people understand what a marignal tax rate is. If you get a pay rise of £1,000 and your income was £65,000 per year, you may expect to see £600 after the higher rate income tax is applied, but this ignores national insurance, student loan repayments (if you have them) and the higher income child benefit charge.

The more children you have, the higher your child benefit is, so the bigger the reduction in your income for every £1,000 you earn more than an adjusted net income of £60,000. This means that for someone with student loan repayments and three children, they will probably see less than £320 of that £1,000 pay rise. By paying some of that pay rise directly into your pension, your income tax and child benefit charge will be reduced (and potentially your national insurance, depending on your pension scheme), and you'll have a bigger pension pot for your retirement!

You can take money out of some pensions before pensionable age, but you will generally face tax charges for doing so. At Milk&Money we hope to expand into helping you to understand your pensions better, but for now, check with your employer, pension provider or financial advisor/accountant about locking away extra money in your pension. It's best to view pension money as locked away completely for your future. 

Every employer and their pension schemes are different, so check with your employer, but many will match pension contributions up to a certain amount. If you weren't already contributing that amount,