18:11 12 November 2012
Letters are landing on the doormats of more than a million families informing them that their child benefit payments will soon be reduced or stopped altogether.
In just over three months' time, child benefit will be reduced on a sliding scale for those earning between £50,000 and £60,000, while families where one parent earns £60,000 or more will no longer be entitled to any child benefit at all.
This means that those who fall into this bracket and who have two children will lose £1,752 a year, based on current payments of £20.30 a week for the eldest child and £13.40 for any subsequent children.
Here, we take a look at what is happening with the controversial cuts, and how those affected can help limit the impact on their pockets.
Child benefit changes
With effect from January 7, 2013, the child benefit system will be means-tested. Families where both or one parent each earns less than £50,000 will keep their child benefit, and so need take no action.
However, families where one person earns £50,000 or more will lose some of their benefit, or all of it if they earn £60,000 or more.
Those who will lose their child benefit can either request to have it stopped, or they can continue to receive it over the year, and then declare it on a self-assessment tax return, so that the money can then be clawed back through the tax system.
Experts claim this second option is likely to be preferable for most, as remaining enrolled for child benefit can help you build up national insurance credits which can help protect your future state pension.
This is particularly important if you've stopped work to look after children full time.
Anyone earning between £50,000 and £60,000 who stands to lose part of their child benefit will again be paid the full amount over the year, and then again any money that they are no longer entitled to taken back in the form of additional tax.
Under the new system, around half a million people who haven't previously had to fill out a tax return will now have to do so.
If you are affected...
If you are going to lose part or all of your child benefit, there are several steps you can take to help minimise the financial impact, or even ensure you hang on to your benefit.
Consider upping your pension contributions
For people earning above £50,000, increasing your pension contributions could help ensure that you retain your full entitlement to child benefit. The reason for this is that HMRC looks at your "adjusted net income" rather than your gross salary when deciding whether or not you will lose your child benefit.
What this means is that if you make pension contributions, this will reduce your income, potentially taking you below the £50,000 threshold. So, for example, if you are earning £55,000, but make pension contributions of £500 a month you shouldn't receive a letter because once your £6,000 annual pension contributions are deducted, this brings your income to below £50,000.
Of course, it won't suit everyone to increase the amount they pay into their pension, but if you are just above the £50,000 threshold, it may make sense to increase them by a small amount.
... .or opt for other ways to reduce your income
Another way to cut your adjusted net income, and therefore remain eligible for child benefit, is to use some of your salary to buy childcare vouchers, medical insurance or to lease a car. Known as 'salary sacrifice' this can also help bring your income to below the threshold.
For example, basic rate tax payers signing up to the childcare voucher scheme now can buy up to £55 of vouchers a week. These can be used to pay for registered childcare at a nursery, playschool, childminder or after-school club.
If you are still going to be hit
If there is nothing you can do to retain your child benefit, then you should look at ways you can make up some of the money you stand to lose. Start by having a thorough look at all your finances and see where you can make savings.
For example, are you paying a steep rate of interest on credit card debt? If so, you should move your balance to a card with an extended 0% introductory rate on balance transfers.
The current market leading balance transfer card is Barclaycard's Platinum Credit Card with Extended Balance Transfer which offers an introductory rate of 0% for a massive 23 months. There is a 2.8% balance transfer fee and, after the introductory period ends, the card has a representative APR of 17.9% (variable).
According to some number-crunching byh MoneySupermarket, switching a £3,000 balance from a card with an average APR of 17.26% to this card would save a massive £731.67 in interest over the 23-month 0% introductory period, even once the 2.8% balance transfer fee has been factored in.
Check your energy tariff
With energy price hikes kicking in, it's vital to ensure you don't end up paying more for your gas and electricity than you need to. Clare Francis, site editor at MoneySupermarket, said: "E.ON will now be the last of the 'Big Six' to show its hand, and the only provider which promised not to hike the cost of standard residential prices in 2012.
"Don't delay - apathy will cost bill payers dear; switch now onto a fixed online tariff, as not only will you beat the price hikes, you'll also protect yourself in case of further increases next year.
"The clocks have changed and the longer, colder nights of winter are drawing in, encouraging people to crank up the thermostat. Any customers languishing on their provider's standard tariff should act now to ensure they switch onto the best deal. There is still time to make a positive difference to their energy bills, but time is of the essence."
You should also review your savings and ensure they are earning as much interest as possible. While rates have fallen in recent weeks it is still possible to earn returns six times' higher than the Bank of England 0.5% base rate with some easy access accounts.
For example, Coventry Building Society's Family Saver account pays an annual equivalent rate (AER) of 3.00% on a minimum investment of £1. This rate includes a 1.00% bonus which is only payable for the first 12 months, so you may want to move your money once this disappears.
Other alternatives include ING Direct's Easy Access Savings account, which pays 2.50% AER and includes a1.97% bonus for 12 months. The account can also be opened with £1.
Finally, be strict about setting yourself a Christmas shopping budget. Try stocking up on presents gradually over the next few weeks, remembering to use deals and discount vouchers to shop, as last-minute panic-buying almost always results in over-spending. Set a budget per person and stick to it - that way you won't be left counting the cost of Christmas long into the New Year.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct. We're free, independent and compare all UK credit cards, as well as offering exclusive deals you can't get anywhere else.
Contact MoneySupermarket.com at Moneysupermarket House, St David's Park, Ewloe, Flintshire, CH5 3UZ. © Moneysupermarket.com Ltd 2012.
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