The High Income Child Benefit Charge starts to claw back child benefit when income exceeds £50,000, with this threshold not changing since its introduction.
For example, Zoe, who claims child benefit for four children, currently earns £50,000, but will receive a £5,000 pay increase for 2024/25. Tax and NICs on the pay increase feel harsh enough at £2,068, with the frozen basic rate tax threshold meaning 40% tax is paid on most of the increase. However, Zoe will also lose £1,987 in child benefit.
It is generally understood that a marginal income tax rate of 60% kicks in on income between £100,000 and £125,140 due to the tapering of the personal allowance. The £100,000 income limit is unchanged since withdrawal was introduced in 2010. However, many may not be aware that governmentfunded childcare entitlement in England ceases to be available at the same £100,000 threshold.
For example, Daniel currently earns £100,000 and claims free childcare worth £12,800 for his two three-year old children. He has been offered new employment at a salary of £120,000. Tax and NICs on the £20,000 additional earnings will be £12,400, leaving £7,600. This is much less than the value of the lost childcare, so Daniel might be advised to reconsider the move until his children are at school.
Higher earners who have been hit by fiscal drag can avoid high marginal tax rates by paying more into their pensions. Both Zoe and Daniel could remove all of the negative impacts from receiving their extra income by making gross pension contributions of £5,000 and £20,000 respectively.
