Family finances are set to be squeezed. The government’s austerity drive is cutting into child benefit and several other family welfare schemes. But don’t rush to tighten your belt yet. Here are some ways in which you can boost your income – and keep your benefits.
What is being cut?
From 2013, the government will withdraw child benefit from higher-rate taxpayers. Currently, that’s anyone earning over £43,875. The annoying, widely criticised part of the plan is that single-wage families will lose benefits when the household income goes over £43,875. But double-income families could earn up to £87,750 before the benefit is lost.
Families also face the end of child trust funds next year. This amounts to a loss of £500 in government pay-outs. The £190 health in pregnancy grant is being axed too. And higher-rate tax payers will also get fewer tax credits next year.
These cuts add up to a loss of up to £4,300 a year for some families, says accountancy firm Grant Thornton. That’s a huge sum of money. It’s the equivalent of over £7,000 of pre-tax income for a 40% tax payer. But if you are prepared to do a little admin work, there are some ways for some people to avoid the cuts.
Say hello to salary sacrifice
Salary sacrifice is a great way to minimise your National Insurance Contributions (NICs). That’s especially worthwhile now. From next April, the rate is rising from 11% to 12% of earnings for those on more than £43,888. On top of that, depending on your income, salary sacrifice could help you keep your benefits.
Beware fees that eat up your pension
You might think the fees you pay your pension fund manager are no big deal. But you’ll be much better off making the investment decisions yourself via a self-invested personal pension.
A salary sacrifice scheme allows you to swap part of your pre-tax income for childcare vouchers, medical insurance, or pension contributions. The money is taken before your wages are taxed, so it’s effectively tax-free. That’s good.
But better yet for some might be the fact that tax calculations are conducted after, not before, the salary sacrifice. This means that if you are earning only a little more than the higher-rate tax band, then sacrificing some of your salary could bring you back into the basic band. So you can save on tax, and protect your benefits.
Pump up your pension
Most people don’t save anywhere near enough for their retirement. So the best salary sacrifice option for most is to boost their pension contributions.
“From 2013, someone earning £45,000 with two children stands to lose £1,752 each year in child benefit, using current rates,” says Colin Jelley, a tax expert at Skandia, in The Daily Telegraph.
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Depending on the details of the new rules, “a pension contribution of £1,500 a year may mean they continue to receive child benefit” (as it takes them out of the higher-rate tax band). On top of this, “the pension contribution would cost only £975 because of the tax relief given by the Government.”
As a result, “they would have £1,500 in their pension and have £777 more in their pocket than if they’d paid nothing into their pension.”
Claim your childcare vouchers
Childcare vouchers are another good option. If your employer is signed up to a childcare voucher scheme, you can swap up to £243 a month of your pre-tax salary for either electronic or paper vouchers.
You can pay for various forms of childcare with these. This includes nursery care, after- or before-school clubs and summer camps. It can even cover babysitting by grandparents, as long as the grandparents are registered with Ofsted, and don’t provide childcare in the parents’ own home.
But these vouchers aren’t immune to government cuts. From April 2011 they will be means tested. That means that higher-rate taxpayers will only be able to claim vouchers worth up to £28 a week. But if you have registered in a scheme by April, then you won’t be means tested – so sign up quick.
Make the best use of these vouchers and they’ll more than offset the loss of child benefit.
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