Example 1: Anne’s HICBC
Anne has ANI of £54,000. She receives child benefit in respect of two children, which amounts to £1,788.80 per annum.
The percentage is 40% ((£54,000 - £50,000)/£100), which means that the HICBC is £715 (40% x £1,788.80, rounded down to the nearest whole number).
Calculating ANI
The four steps to calculating ANI are set out in ITA 2007, s 58. The steps are:
Step one
Identify the individual’s net income for the tax year. This is the sum of income chargeable to income tax, less any of the reliefs the taxpayer is entitled to under ITA 2007, s 24, subject to an overall limit on reliefs (prescribed by ITA 2007, s 24A).
The reliefs listed in ITA 2007, s 24 include relief for excess pension contributions made under net pay arrangements (i.e. where the contribution is greater than the employment income) and relief for pension contributions on making a claim (i.e. where no relief is given when the contribution is paid, such as for pre-1988 retirement annuity contracts).
Step two
Deduct the grossed-up amount of qualifying gift aid donations. This includes any gifts treated as made in the tax year by way of a carryback election (under ITA 2007, s 426). The donations are grossed-up by the basic rate of income tax of 20% (e.g. qualifying donations of £800 would be grossed-up to £1,000).
Step three
Deduct the grossed-up amount of pension contributions where tax relief is given at source. If a member is making payments totalling £3,600 per annum, this would be grossed-up at the basic rate to contributions of £4,500.
Step four
Add back any deductions given for payments made to trade unions or police organisations.
Pension contributions
Additional pension contributions can reduce the HICBC if they sufficiently reduce ANI.
Example 2: Anne makes an additional pension payment of £3,200
In Example 1, Anne had ANI of £54,000. If she made an additional pension payment of £3,200 where relief is given at source, this would reduce Anne’s ANI to £50,000, as the payment would be grossed-up to £4,000. Anne would avoid a HICBC of £715 and, assuming her income is taxed at 40%, she would also make a further tax saving of £800 (i.e. the difference between £1,600 (£4,000 x 40%) and the £800 tax relief at source).
Overall, the additional pension contribution of £4,000 has only cost Anne £1,685 after-tax savings of £2,315.
Beware the limits
Whilst there are no limits on the amounts that can be saved into a pension, there are limits on the tax relief available. Tax relief for pension contributions is limited to the greater of £3,600 and the individual’s relevant UK earnings. Relevant earnings are made up of:
- employment income;
- income from a trade, profession or vocation,
- income from furnished holiday letting in the UK or EEA; and
- patent income from an invention devised individually or jointly by the taxpayer.
Crucially, relevant earnings do not include dividend income.
Care also needs to be taken not to trigger an annual allowance charge or a lifetime allowance charge.
Partner with ANI exceeding £50,000
Where both partners have ANI exceeding £50,000, lowering the ANI of the higher income partner could transfer the HICBC to the other partner, albeit in a lower amount. The benefit of planning in these circumstances may be limited to the differential in incomes.
Practical Tip:
As taxpayers subject to the HICBC suffer high marginal tax rates, those with ANI in the £50,000 to £60,000 band can make additional pension contributions at a relatively low cost after tax relief and savings.
