Expert explains £60k 'pension rule' that allows parents to keep claiming child benefit

Around 712,000 families have opted out of receiving since the introduction of the High Income Child Benefit Charge (HICBC) in 2013.

The charge was brought in when the was introduced. This has now been raised to £60,000 which means more families may be entitled to child benefit again.

The HICBC reduces the person's child benefit payment by 1% for every £100 earned over £60,000 which means child benefit is no longer payable once someone earns £80,000; full child benefit, which is paid at £26.05 a week for the oldest child and £17.25 per week for each child after.

However financial adviser Quilter said parents who earned between £60,000 and £80,000 should consider using their pension to enable them to keep claiming, or claiming a higher rate of, child benefit.

They can do this by paying more into a pension. These payments are tax free and mean someone effectively reduces their annual salary. So if there pension contributions bring them under £80k they can start claiming child benefit.

Holly Tomlinson, financial planner at Quilter, "Contributions made through salary sacrifice reduce your taxable income before it's even paid. This can help bring you below the £60,000 threshold or reduce how much of the benefit is clawed back. Even personal pension contributions made from net income attract tax relief and reduce your adjusted net income, offering a powerful incentive to save for retirement while protecting access to child benefit."

Quilter said someone who earns £75,000 but increases their pension contributions by £400 a month, could still claim £15,931 in child benefit over the 12-year period during which their children are eligible. The long-term result would be to increase their pension pot by £167,364 at age 68, assuming a modest growth of 2% after charges and inflation.

Susan Hope, a workplace savings specialist at Scottish Widows, explains how salary exchange, also known as salary sacrifice, works.

She said it is an agreement between and employee and employer, where the employer agrees to reduce their gross salary in exchange for an employer paid pension contribution.

So, for someone on £35,000, they would agree to reduce their salary by 5% (£1,750) in exchange for that amount being paid over into pension, in addition to the employer's contribution.

The saving comes from the £1,750 not hitting the employee's pay packet, therefore avoiding:

15% employer NI (15% x £1, 750) = £262.50 saving for the employer. The employer can choose to keep the saving to support the business, other benefits or reinvest into the employees' pension.

8% employee NI (8% of £1,750) = £140 saving for the employer. The employee either has the saving in their take home pay or reinvested into their pension (this is the employer's decision).

• Reduced salary can also potentially delay or reduce student loan repayments.
• Those earning £60k to £80k can reduce the High Income Child Benefit Charge
• And those earning around £100k who can reduce their salary below that limit can benefit from the loss of childcare hours and from an increased personal allowance.