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Withdrawal of child benefit from high rate taxpayers could encourage them to increase their pension contributions

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The Chancellor's announcement that child benefit will be withdrawn from families where at least one parent pays 40% tax could create strong incentives for people earning just above the higher rate tax threshold to increase their pension contributions, according to Towers Watson.

Someone earning just over the higher rate threshold can take themselves out of the higher rate tax bracket by paying more into a pension. From 2013, this could mean their family remains eligible for child benefit payments potentially worth thousands of pounds a year.

Paul Macro, a senior consultant at Towers Watson, said: "From 2013, some families could find that putting more money aside for retirement increases the cash in their pocket as well as their pension fund. The costs of raising children can prevent parents paying as much into their pensions as they feel they should. For some, it may now be a question of whether they can afford not to save more. For a family with three children, child benefit can be worth nearly £2,500 a year, tax-free."
 
Child benefit is paid at a rate of £20.30 per week for the first child and £13.40 a week for each subsequent child; these rates have been frozen for the next three years. In 2010/11, people start paying higher rate tax once their income exceeds £43,875. An example of how increasing pension contributions could increase disposable income is below. This assumes that child benefit is withdrawn altogether from all higher rate taxpayers rather than being tapered away.

Macro added: "If there is a simple cut-off point based on the tax band of the parent with the highest earnings, people will look at what they can do to push their income below the threshold. It is only the least well off of the ‘child benefit losers’ who can easily take themselves out of the higher rate tax bracket, and the Government would probably accept that a few hundred pounds of extra taxable income should not make families thousands of pounds worse off. So it might not regard increasing pension contributions to preserve child benefit as an affront to the idea that ‘we’re all in this together’.
 
"If the whole child benefit payment is withheld from all higher rate taxpayers, employers will also need to be conscious that a small routine pay rise could inadvertently leave some employees worse off."