Parents could hold onto child benefit by paying more into pension

Thousands of families look set to lose their child benefit if the Government goes ahead with plans to remove the subsidy for higher earners.

The Government has yet to reveal details of the changes, but when announced in October 2010, Chancellor George Osborne referred to the plans as 'tough but fair', and designed to affect couples or single parents where one person's income is above the higher rate of £42,475 (£35,000 + personal allowance of £7,475).

But critics claim that this will end up hitting single wage families harder. As the proposal stands, a couple where both parents earn below the threshold would be allowed to keep the benefit, when this could easily total more than one parent earning above the higher rate threshold.

NFU Mutual claims that 180,000 families with one earning parent could be affected by the change, due to come in from April 2013, but that those families could be better off paying more of their salary directly into their pension, which would take them below the threshold, and mean that they could keep the child benefit.

According to NFU Mutual, the amount that 143,000 of the families affected would have to pay into a pension to take them below the threshold, would be less than the child benefit received (more than £1,750 a year for a family with two eligible children).

Commenting, Sean McCann, personal finance specialist at NFU Mutual said: "We're still waiting for the Chancellor to show his hand on this issue but we know that change to the child benefit system is coming for families paying 40% income tax.

"Losing child benefit payments could make a big dent in many household incomes, but for many parents, putting a little more into the pension in order to bring down earnings below the higher rate threshold could help to make the most of their income.

"The tax efficiency of pension contributions could be key to these families from April 2013 but it's likely that, as ever, being tax savvy and taking financial advice will be as important this year as next."

According to reports, the Chancellor and Prime Minister are seeking to make the benefit reform fairer, but the absence of any definition of 'household' in tax law, will make this complicated, the Low Income Tax Reforms Group claims.

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