Do you want to save some serious cash and build up your pension at the same time? Are you a higher earner with kids? If so then this little-known pension hack could be right for you. It allows you to keep more of your Child Benefit by paying extra into your pension.
Here, I take a look at how this pension hack works and how you could save nearly £2,000 in Child Benefit per year.
What are the child benefit rules?
In 2013, then Chancellor George Osborne brought in new Child Benefit rules. Under these rules, higher earners start to lose Child Benefit once they earn over £50,000 and by the time they earn £60,000, they get no child benefit at all.
Some people think the rules are unfair because a couple who each earn £49,000 get to keep their Child Benefit whereas a family with a single earner on £51,000 starts to lose their Child Benefit.
What impact do the rules have on families?
The rules mean that higher earners with children have an extremely high effective tax rate of over 60%.
That’s because they lose Child Benefit as well as paying higher rate Income Tax. A parent earning £60,000 pays 42% Income Tax and National Insurance on their earnings between £50,000 and £60,000. But they also lose all of their Child Benefit at the end of the year and have to pay it back through the High Income Child Benefit Charge. It’s a double whammy for families.
An example of the impact
Jenny earns £50,000 and has two children. She moves jobs and gets a pay rise of £10,000 so that she now earns £60,000. But the extra tax she will pay and the lost Child Benefit mean she has hardly any extra money in her pocket. She earns £10,000 more but pays £4,200 of it in Income Tax and National Insurance and loses £1,825 in Child Benefit.
Although she earns £10,000 more, she only has £3,975 extra take-home pay and has an effective tax rate of 60.3% on her extra earnings.
How can paying more into your pension save you money?
The good news is that there’s a little-known pension hack you can use to keep more of your hard-earned money. The hack works by paying extra money into your pension to keep your earnings below £50,000.
The rules mean you can pay £8,000 into your pension (topped up to £10,000 by the government), keep your Child Benefit of nearly £2,000 and get a £2,000 tax rebate on top. That’s because the Higher Rate Child Benefit Charge is calculated using net earnings after pension payments and gift aid. If you keep your earnings below £50,000 you will keep your Child Benefit and get a tax rebate on your pension contributions.
An example of the impact
Stefan earns £60,000 and has two children. He decides to pay £8,000 into his private pension and the government tops it up to £10,000. Stefan also gets £2,000 back as a rebate from the taxman at the end of the year. He doesn’t lose any Child Benefit because his net income is £50,000, so he gets to keep £1,825 Child Benefit per year. It only costs him around £4,000 per year to pay £10,000 per year into his pension. But his net wealth including his pension wealth is amazing.
How much can you save with this pension hack?
Here’s a table to show the difference in wealth between Jenny, who loses her Child Benefit, and Stefan, who keeps it by paying extra into his pension.
| Jenny | Stefan | |
| Salary | £60,000 | £60,000 |
| Net pay after Income Tax and NI | £43,489 | £43,489 |
| Pension contribution | £0 | – £8,000 (topped up to £10,000 by the government) |
| Tax Rebate | £0 | £2,000 |
| Child Benefit | £0 | £1,825 |
| Total cash | £43,489 | £39,314 |
| Total cash (including amounts paid into a pension) | £43,489* | £49,314* |
*These figures are illustrative and may be different depending on your circumstances.
Please note that tax treatment depends on your individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
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About the author
A Chartered Accountant, Mum and personal finance geek, Alice writes on topics including budgeting, saving and investing.
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