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?

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!

Tax tricks to improve your wealth

Tax tricks to improve your wealth

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.

Budget winners and losers

Budget winners and losers