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How 40% Tax Payer Families Can Keep Child Benefit Using Pensions

Personal_Finance / Taxes Oct 07, 2010 - 06:10 AM GMT

By: Nadeem_Walayat

Personal_Finance

Firstly, virtually all of the mainstream press are WRONG in the assumption that the 40% tax band kicks in next tax year from £44,000 because they have failed to take into account tax changes announced in the June emergency budget that in effect reduces the higher rate tax band towards a rate of approx £42,500 (pending release of September RPI later this month).


Therefore those earning £42,500 to £44,000 have been given FALSE assurances by the mainstream press that includes the Financial Times, Guradian Telegraph, Daily Mail, Times and the rest because from 1st April 2011 they will have been moved into the higher rate tax bracket as I explain below.

The Coalition government as part of the Liberal Democrats manifesto promise for raising the basic tax free allowance towards £10,000 announced in the June emergency budget that the tax free allowance will rise to £7,475 from April 2011 which will cost £3.5 billion. However this tax cut has been clawed back from those earning over £44k by means of lowering the threshold for higher rate tax payers which means that the higher 40% tax rate kicks in at a lower rate of approx £1,500 against that for 2010-2011 so as to negate the impact of the increased tax free allowance.

How to avoid the Child Benefit Time Bomb

By increasing ones contribution to ones personal pension to reduce the taxed income in the current tax year to below the 40% tax band.

i.e. £45,000 current gross taxable income

Personal £2,000 net contribution into a personal pension

HMRC Higher rate tax contribution £800 (40%)

Total pension contribution £2,800

Therefore the tax payer is no longer taxed at the higher rate for the current tax year i.e. registering as £42,200, BELOW the 40% tax bracket, therefore higher rate tax payers should get to keep their Child Benefit, this many can achieve a higher net pay (including CB) WITH extra pensions contribution.

The validity of the above tax bracket reducing procedure as well as others such as childcare vouchers will become clearer once the Coalition government has finished announcing all of its tax and benefit changes ahead of the 2011-12 tax year, so I will come back to this topic in depth in a few months time.

Comments and Source : http://www.marketoracle.co.uk/Article23312.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 24 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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Comments

jonnysingapore
08 Oct 10, 20:21
top rate taxpayers

Nadeem - the median income for a top tax rate payer is apparently £75K, so many would be caught so I disagree with your synopsis though no doubt there are marginal cases, but bear in mind:

1. This is instead of raising income tax from 40% (cowardly politics).

2. Its not for 3 years, so its a bit lame really.

3. May not last into the next parliament.

4. £1million IHT threshold is going to get introduced by the tories once the deficit is close to being addressed, so these higher rate taxpayers' families will get a huge windfall as a trade off.

Can't wait for your analysis of the to be announced cuts with respect to the effect on the economy.


Nadeem_Walayat
08 Oct 10, 20:36
cuts impact

Hi

I analysed the impact of the cuts on the UK economy a couple of months ago - 09 Aug 2010 - UK Economy GDP Growth Forecast 2010 to 2015

And yes it is not for 3 years, which makes me suspect that it will not be implemented.

Best

NW


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