Director dividend trap could cost parents Child Benefit

Small business parents warned over £60,000 tax trap

Small business directors with children could be sleepwalking into an expensive tax trap. HMRC is reminding parents to renew Child Benefit by 31 August if their 16-to-19-year-old is staying in education, but for company directors there is another calculation to make. Salary and dividends can push income through the £60,000 threshold at which Child Benefit starts being clawed back. Unlike most employees, directors have some control over when and how they take income, so planning dividends and pension contributions before the tax year ends could make a significant difference. Speak to your accountant before taking action.

DIRECTORS WARNED TO ACT ON CHILD BENEFIT

HMRC put out an announcement on 17th August that you may have missed…or understandably not fully understood. There’s two parts to it.

The first part is simple:

HMRC has reminded parents that if their child is 16–19 and staying in school or college, they must extend their Child Benefit claim by 31 August. If they don’t, Child Benefit stops automatically, even if the teenager is still in education.

The second part is a lot more complicated:

For company directors there’s a second issue that HMRC didn’t spell out clearly in its announcement and it’s the one that costs families money. If you are a director of a small or micro business this could affect you and is fairly complicated so you would be well advised to talk it over with your accountant.

Directors can accidentally lose child benefit because of how they pay themselves

Child Benefit is clawed back if one partner in the family earns over:

• £60,000: you start losing some

• £80,000: you lose all of it

This is called the High Income Child Benefit Charge.

Employees can’t control their income and the only way they can stay below the limits is to pay more into their pension. Company directors can control their income and this warning and deadline is for you.

Directors have control over:

• how much salary they take

• how much dividend they take

• when they take the dividend

• whether they split income across tax years

This means two families earning the same total money can be treated completely differently simply because one parent in one of the families is a company director.

An Example:

Imagine a director normally takes a dividend in late March. If that dividend pushes their income over £60,000, they lose some Child Benefit on a sliding scale up to £80,000. If the dividend pushes them over £80,000, they lose all of it.

But if they simply wait until 6 April, in the next tax year, they may keep every penny.

Employees can’t do this. Directors can. That’s why this rule hits small business owners differently.

Between now and 5 April

Extend Child Benefit by 31 August if your 16-19 year is staying on at school or college, otherwise it stops.

Check your income now, not in January. Look at your salary + dividends.

If you’re near £60k, plan the timing of any dividend. You may be able to keep Child Benefit simply by:

• delaying a dividend

• splitting it across tax years

• taking a smaller amount

• using a pension contribution instead

Talk to your accountant before 5 April.

Ask: “Will this dividend make me lose Child Benefit?” If nobody raises it, you can lose hundreds of pounds without realising.

A real example: A director takes a £10,000 dividend in March. It pushes their income to £61,000.

They lose £1,200 in Child Benefit. If they had taken the dividend on 6 April, they would have kept all of it.

Nobody warned them. They found out months later when the tax return was filed, too late to fix it.

Small and micro business owners beware

The 31 August deadline is just about keeping Child Benefit going for teenagers in education. The real risk is the High Income Child Benefit Charge. Directors can avoid losing Child Benefit by planning salary and dividend timing before 5 April. Employees can’t; directors have more control, but also more ways to get caught out. A quick conversation with your accountant can save you hundreds of pounds.

Small business owners warned to watch the £60,000 threshold

Director dividend trap could cost parents Child Benefit

Small business directors with children could be caught by an expensive tax trap if salary and dividends push their adjusted net income above £60,000. At that point, the High Income Child Benefit Charge begins clawing back Child Benefit, with the benefit effectively lost altogether at £80,000.

There’s also an immediate deadline. Parents whose 16-to-19-year-olds are continuing in approved education or training need to extend their Child Benefit claim by 31 August or payments can stop automatically.