Higher earners may boost pension savings to avoid losing child benefits

Higher rate tax payers may channel more money into their pension savings in a bid to avoid losing out on child benefit payments when new rules come into force next year.

Research commissioned by Prudential found that one in six high earners are expecting to see their child benefit payments reduced under the new rules, with a quarter of these saying they may pump more money into their pension savings to avoid paying the new child benefit tax.

From 7 January 2013, homes where one parent earns more than £50,000 will have their child benefit cut, with the amount received gradually reducing before being removed completely once a household member's income reaches £60,000 or more.

Families currently receive child benefit payments of £1,055.60 a year for the eldest child, with a further £696.80 a year for each additional child.

Under the new rules, a high earning family with three children under 16 could lose out on up to £2,499.20 a year. Figures from the BBC suggest the new rules will reduce the child benefit entitlement of more than a million families.

Prudential's tax expert Matthew Stephens said the new child benefit tax charge will be a 'real blow' for many families, 'particularly in households where salaries are unevenly distributed and one parent is the main or sole breadwinner.'

"There is, however, a strong case for a parent whose income is between £50,000 and £60,000 to make additional pension savings to avoid the new tax, and at the same time boost their retirement income," he said.

The Institute of Chartered Accountants in England and Wales (ICAEW) sent a report to MPs in May this year raising concerns about the new tax, which head of tax Frank Haskew said would be a 'disaster'.

Haskew said the new system "may rely on partners sharing information about their finances, which some couples keep secret. And it will be problematic when relationships break down."

A parent earning more than £60,000 may choose to stop claiming child benefit all together, or to keep claiming and have the amount clawed back by HMRC when declaring the entitlement on a self-assessment tax form.