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Tax credit cuts for higher rate taxpayers

If you have missed the media storm surrounding changes to the tax credit system, you may be in for a shock.

If you are a higher rate taxpayer (earning more than £50,000) and you currently claim child tax credits, you can expect to receive notification from HMRC very soon that your benefits will be cut or removed. You will be expected to repay any overpaid benefits via the tax system.

You will also be asked to complete a tax return, so that HMRC can work out precisely how much you need to pay back.

If this is the first time you have had to complete a tax return, you may find the experience a little unnerving. If you have multiple income sources (for example a rental property), the completion of your return will increase in complexity and you may feel it appropriate to consult an accountant or tax adviser.

An area that you should be thinking about now, especially if your household income is divided unequally between a breadwinner and a home maker is ways to reduce the principal household income. You could consider:
  • ensuring that income generating assets are held by the partner with the lowest income. This could include rental property, investments or cash deposits.
  • the partner with the highest income making additional pension contributions.
  • the partner with highest income sacrificing salary for other rewards such as holiday entitlement or employer funded pension contributions.
These points can also give rise to tax savings and it may be the case that you have already considered these for tax reasons. Remember that tax exempt assets, such as ISA's, still create income for benefit assessment purposes even though they are exempt from income tax. If you have accumulated substantial funds in ISA's, these will need to be considered as well.

Particular care should be taken by non-married couples when considering the transfer of assets since this could give rise to capital gains tax. This does not apply to transfers between married couples. 

It is very easy to fall foul of the rules and leave yourself in a worse position by make changes. Before doing so, it is always important to consult an accountant or tax adviser to ensure that whatever action you plan to take is appropriate and worthwhile.