As most parents now know only too well, the new tax on Child Benefit kicked in on 7 January for all families where someone has income of more than £50,000 a year. We are told you can either pay the new tax or opt out of Child Benefit altogether.
But there are other options – namely to arrange your financial affairs so that neither of you have income exceeding £50,000. For ordinary employees, you can always make pension contributions to keep you below the £50,000 threshold.
Not only do you get the 25% Government top-up and save higher rate tax, you will now get to keep your Child Benefit too (or at least some of it).
If you pay enough into your pension already, you might like to consider salary sacrifice. This is an arrangement with your employer whereby you give up salary in exchange for a contribution by the employer to your pension scheme.
If it saves you paying into your pension yourself, you could well end up with even more disposable income than you have now. However, this depends on how generous your employer is with their own National Insurance savings.
One of the more perverse features of the new tax is that it does not relate to family income. Consequently, a single parent on £60,000 loses all their Child Benefit whereas a couple on £50,000 each lose none of it. It makes good sense to arrange matters so that neither partner gets more than £50,000 a year.
For the self-employed, this can be done by splitting income with your spouse or partner in a more equitable way. The ease with which you can do this depends on the legal form of your business.
For couples in a partnership business it is easy because all they have to do is vary their share of the profits. The taxman cannot attack this, no matter how little work one partner does. So long as you can truthfully state it was so agreed, even verbally, it is up to you how you split the profits.
For limited companies, the owner could gift some shares to his/her spouse and split the dividends. Again, the taxman cannot attack this so long as the shares are an outright gift and bestow voting rights as well as dividends.
For sole traders it is more difficult as spouse wages must always be proportionate to the work done. You cannot pay your spouse more than anyone else would for the same work, at least not for tax purposes.
However, there is nothing to stop a sole trader from working through a limited company instead and gifting shares. In fact, trading via a company would be tax-efficient for many other reasons too.
The other thing you can do is retain profits in your company so your income does not exceed the £50,000. This may mean restricting how much money you take out of the company, although former sole traders and partnerships could alleviate this by drawing down on the money owed to them by their company for the sale of their business.
Finally, there is another somewhat drastic solution, and that is to live apart (most of the time) and keep your financial affairs totally separate. Not perhaps what our family friendly Government envisaged when they dreamed up this new tax. However, it may appeal to live-in boyfriends who don’t fancy paying tax at eye-wateringly high rates on the mother’s Child Benefit, especially if they don’t expect the relationship to last much longer anyway.