Some parents to pay 73% tax - what can you do?

family at sunsetAP Photo/Dmitry Lovetsky

Changes to the Child Benefit system have brought about a ridiculous situation for some parents. When they hit a particular income level, they will find themselves paying a marginal tax rate that's higher than most millionaires.

So how is this possible, and what can you do about it?%VIRTUAL-SkimlinksPromo%
You could be forgiven for thinking that having children was expensive enough. With all the talk from central government about not having children unless you can afford to support them, you would think they might be appreciative of people who work hard and get on in their careers before having kids.

However, their response has been to remove child benefit from higher wage earnings - making more than £50,000 - and the way they have chosen to do so leaves them paying an insane rate of tax on a portion of their income.

Massive tax rate

The issue is that as soon as one parent is earning more than £50,000 the system will start to claw back benefit payments through the tax system. For every pound more than £50,000 that you earn (up to £60,000) more and more of the benefit is clawed back.

Accountants Smith & Williamson did the maths for The Telegraph and discovered that everything you earn between £50,000 and £60,000 is effectively taxed at 52% if you have one child. If you have four children it is taxed at a staggering 73%. That means 73p in every pound you earn goes straight to the government. That's far higher than the rate on a millionaire's income - even if he or she pays their taxes!

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Some parents to pay 73% tax - what can you do?

If you wear a uniform of any kind to work and have to wash, repair or replace it yourself, you may be able to reclaim tax paid over the last four years. For some people, this could mean a windfall worth hundreds of pounds

The interest you receive on savings accounts (with the exception of cash Isas) is automatically taxed at a rate of 20%.

Higher-rate taxpayers therefore tend to owe money on the interest they are paid throughout the year. If, however, you are on a low income or not earning at all, you should be able to claim all or some of the tax deducted back

You can apply for a refund of vehicle tax if you are the current registered keeper or were the last registered keeper of your vehicle that no longer needs a tax disc

If you pay tax on a company, personal or State Pension through PAYE (the system employers use to deduct tax from your wages), you may well end up overpaying

There is a limit to the amount you need to pay in NI, whether or not you work for an employer.

Instances in which you may find that you have overpaid include if you work two or more jobs and earn more than £817 a week and if you move from self-employment to employment, but continue to pay Class 2 National Insurance contributions


What can you do?

There will be those who argue that people earning more than £50,000 can afford to pay a bit more tax. However, there are others who will point out that there's no coherent argument why they have to pay considerably more tax than a couple where both are earning £25,000. There's certainly no argument for why their marginal rate ought to be higher than someone earning £10 million.

Those earning between £50,000 and £60,000 do have an option to escape this tax charge - they can increase their pension contributions. Money that is put directly into your pension isn't taxed, so you can increase your pension contributions to the point where you fall out of the new rules - saving a small fortune in tax.

Sean McCann, personal finance specialist at NFU Mutual, said: "For many parents, putting a little more into the pension in order to bring down earnings below the threshold could help to make the most of their income."

Of course, you have to be able to afford to salt that cash away for retirement, which those with four children and a non-working partner may struggle with, but it's certainly worth doing the maths and checking which scenario works best for you.

Because while you'll struggle to get much sympathy from most people if you make more than £50,000, there's no reason why you should be paying a higher tax rate than a millionaire.

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Some parents to pay 73% tax - what can you do?

As of April 2013, the 50p rate will be reduced to 45p following a study which Osborne claims revealed it would make little or no difference to the amount of tax raised but would significantly reduce the damage to the economy. 

The much-debated cut to child benefit was confirmed, albeit through a less direct hit than was outlined in the pre-Budget report. The benefit will be removed gradually for those earning more than £50,000 – reducing by 1% for every £100 earned over the threshold, cutting off completely at the £60,00 mark. The Chancellor had planned to axe it where one parent earned over £43,000.

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The cost of a room in a care home in many parts of the country is now over £30,000 a year, according to figures from Prestige Nursing and Care. So even if the prime minister announces a cap on care costs - last year the economist Andrew Dilnot called for a new system of funding which would mean that no one would pay more than £35,000 for lifetime care - families will still face huge accommodation costs. Ways to cut this cost include opting for home care rather than a care home. Jonathan Bruce, managing director of Prestige Nursing and Care, said: "For older people who may need care in the shorter term, home care is an option which allows people to maintain their independence for longer while living in their own home and should be included in the cap." However, the only other answer is to save more while you can.

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