How to avoid the child benefit tax charge

With the cost of living crisis not showing any signs of slowing, it is more important than ever for parents to make the most of all their entitled benefits. Child benefit is a government-run scheme to help all parents with the costs of raising a child. However, since the introduction of the High Income Child Benefit Charge (HICBC) in January 2013, those earning in excess of £60,000 (as of the 2024/25 tax year) are liable for a tax charge, resulting in a loss of a portion of their child benefit.

In this article, we'll explore what that means and how you can avoid the child benefit tax charge altogether.

What is Child Benefit?

UK law states that you are entitled to Child Benefit if you are responsible for bringing up a child who is:

• Under 16
• Under 20 if they stay in approved education or training

The benefit is paid every four weeks, with no limit on the number of children you can claim for. However, only one parent can claim for a given child.

By claiming Child Benefit, you can:

• Receive an allowance for each child
• Earn National Insurance credits that count toward your State Pension
• Ensure your child gets a National Insurance number automatically before they turn 16

Even if you choose not to receive Child Benefit payments (to avoid the tax charge), you should still submit a claim to access these benefits.

There are 2 Child Benefit rates:

• Eldest or only child: £25.60 weekly
• Additional children: £16.95 per child weekly

Here's a quick example of what this means in the real world: A parent with an annual income of £35,000 with 2 children would be entitled to approximately £2,212.60 with no tax charge - around £184 each month.

What is the Child Benefit tax charge?

Any parent (or their partner) with an individual income over £60,000 for the 2024/25 tax year is liable to pay a High Income Child Benefit Tax Charge. (Previously, the threshold was £50,000.)

Every £100 of income above the £60,000 threshold sees 1% of the total Child Benefit amount reduced. This is calculated on the adjusted net income (ANI). For those earning over £70,000, the tax charge cancels out the Child Benefit entirely.

The charge applies to the highest earner in a household, even if they are not the one receiving the benefit. For example, if a couple both earn over £60,000, whoever has the higher income must pay the charge.

This has been controversial - with some referring to it as the child benefit tax trap. The person liable for the tax charge is the parent with the higher income. For example, for a couple both earning in excess of £60,000, whoever has the highest income would be responsible for paying the charge at the end of the tax year.

However, there are ways to reduce your taxable income and potentially avoid the charge altogether.

How to avoid the Child Benefit tax charge

One of the most straightforward ways to avoid the child benefit tax charge is simply to tell HMRC that you don't want to receive any child benefit. Naturally, this means you'll no longer be liable for any charges.

However, just because you don't wish to receive any child benefit, doesn't mean you shouldn't claim it. Let us explain. For non-working parents, it can still be beneficial to fill out a Child Benefit claim form as you it lets you earn National Insurance credits. This will impact the amount of State Pension you receive - as you need 35 years of National Insurance contributions to be eligible for the full new State pension. You'll need at least 10 years on your National Insurance record to qualify for any State pension.

Claiming Child Benefit then comes with fringe benefits too - so what are the best ways of avoiding the child benefit tax charge? Let's take a look.

1. Pension contributions

First up, your pension. Paying into your pension is one of the most tax-efficient and effective ways to reduce your annual net income (ANI). Pension contributions helps to reduce your taxable income, meaning you're less exposed to that £60,000+ child benefit tax charge bracket. Here's how it works.

The figure below shows the overall value of Child Benefit received for a couple with two children.

On the left, we can see the overall value of the child benefit received if the couple didn't make any pension contributions. As you can see, because their taxable income is above the £60,000 threshold, the benefit is subject to a 60% tax charge. They have to pay back £1,106.

On the right, the same couple makes a pension contribution of £10,000 in the tax year. After receiving 20% tax relief, the total amount deductible from their income is £8,000.

This would then bring their overall taxable income down to £60,000. As a result, there would be no tax charge payable and the value of the child benefit would remain at £2,212.60. They've made a huge saving of £1,106 for the tax year - plus, as a higher earner, they could claim higher rate tax relief back via a self-assessment tax return.

2. Salary sacrifice

Another option for reducing your child benefit tax charge is through salary sacrifice. Here, you'll reduce your salary ' on paper' in exchange for another non-cash benefit. Popular examples include a pension contribution or childcare vouchers. To find out more about how salary sacrifice can trim your tax bill, check out our guide to salary sacrifice here.

3. Charitable donations & Gift Aid

You can also reduce your taxable income by making charitable donations under Gift Aid. Here, you won't save any tax yourself but will enable your charity of choice to get an extra 25% on top of your donation back from HMRC. This also helps cut your Child Benefit charge. All you'll need to do is add your Gift Aid donations to your tax return.

What if your income exceeds the threshold?

If your income exceeds £60,000, you can either:

• Continue receiving Child Benefit and pay the tax charge at the end of the tax year.
• Opt out of receiving Child Benefit payments to avoid the charge.

Even if you opt out, you should still submit a Child Benefit claim to protect your National Insurance credits and ensure your child gets their National Insurance number automatically.

Conclusion

As we have seen, there are a few ways of avoiding the Child Benefit tax charge - with one of the most effective via paying into a pension. For those earning above the £60,000 threshold, there are huge savings to be made by regularly paying into a pension plan and reducing your annual net income figure back down toward £60,000.

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