Child Benefit Charge

The High Income Child Benefit charge applies to a taxpayer who has income over £50,000 in a tax year where either they or their partner, if they have one, are in receipt of Child Benefit for the year.

We set out below the main points of the charge and illustrate some of the practical issues.

 

Will this affect my family?

Legislation imposes a new charge (the High Income Child Benefit charge) on a taxpayer who has ‘adjusted net income’ (explained later) over £50,000 in a tax year where either they or their partner, if they have one, are in receipt of Child Benefit for the year. Where there is a partner and both partners have adjusted net income in excess of £50,000 the charge will only apply to the partner with the higher income.

 

And when does the new charge apply?

The charge will have effect for any week beginning on or after 7 January 2013 and for 2012/13 will apply to the Child Benefit paid from that date to the end of the tax year. The income taken into account will be the full income for 2012/13 not just the income for that part of 2012/13!

 

Practical issues

Some couples with fluctuating income levels may find that they are caught by the charge or perhaps that the partner who usually has the highest income does not actually end up paying the charge as the following example illustrates.

Example

Nicola who receives Child Benefit is employed as a teacher and earns £52,000 a year. Her husband Alan is a self- employed solicitor and his accounting year end is 31 March. He is late in submitting his books and records to his accountant for the year ended 31 March 2013. His results for that year will form his taxable profit for 2012/13 which is the first year that the new charge arises. Nicola and Alan do not have any other income other than their earned income but his profits are generally in excess of £60,000. On this basis Nicola assumes that Alan will be liable for the charge.

In January 2014 Alan’s accountant completes his tax return, files this in advance of the 31 January deadline and advises that his profit has reduced to £48,000 as he had experienced a number of bad debts.

As a result Nicola has the highest income for 2012/13 and is therefore responsible for paying the charge by 31 January 2014 and she will need to contact HMRC about this.

For couples who do not share their financial details there is a problem as it will be difficult to accurately complete their tax return (or know if they need to contact HMRC to request one) if their own income is over £50,000 and Child Benefit is being claimed. Only the highest earning partner is liable so this will need to be determined.

 

Changes in circumstances

As the charge is by reference to weeks, the charge will only apply to those weeks of the tax year for which the partnership exists. If a couple breaks up, the partner with the highest income will only be liable for the period from 7 January (for 2012/13) and 6 April thereafter to the week in which the break up occurs.

Conversely, if a couple come together and Child Benefit is already being paid, the partner with the highest income will only be liable to the charge for those weeks from the date the couple start living together until the end of the tax year.

 

So what is the adjusted net income of £50,000 made up of?

It can be seen that the rules revolve around ‘adjusted net income’, which is broadly:

  • income (total income subject to income tax less specified deductions e.g. trading losses and payments made gross to pension schemes)
  • reduced by grossed up Gift Aid donations to charity and pension contributions which have received tax relief at source.

In some cases it may be that an individual may want to donate more to charity or make additional pension contributions for example, to reduce or avoid the charge.

Inequity applies as household income is not taken into account.

Therefore, equalising income for those who have the flexibility to do so such as in family partnerships or family owner managed businesses becomes important.

 

Who is a partner for the purpose of the charge?

A person is a partner of another person at any time if any of the following conditions are met at that time. The persons are either:

  • a man and a woman who are married to each other and not separated or
  • a man and a woman who are not married to each other but are living together as husband and wife.

Similar rules apply to same sex couples.

 

The charge

An income tax charge will apply at a rate of 1% of the full Child Benefit award for each £100 of income between £50,000 and £60,000. The charge on taxpayers with income above £60,000 will be equal to the amount of Child Benefit paid.

Example for 2012/13

A married couple have two children and receive £438 Child Benefit for the 13 weeks from 7 January to the end of the tax year. The wife has little income. The husband’s income is over £60,000 for the whole of the 2012/13 tax year. So the tax charge on the husband is £438.

Example for 2013/14

The Child Benefit for two children amounts to £1,752 per annum. The taxpayer’s adjusted net income is £55,000. The income tax charge will be £876. This is calculated as £1,752 x 50% (£55,000 – £50,000 = £5,000/£100 x 1%).

 

How will the administration operate?

In the self assessment system individuals are required to notify HMRC if they have a liability to income tax and capital gains tax by 6 October following the tax year. This requirement is amended to include situations where the person is liable to the Child Benefit charge.

In addition, the charge is included in PAYE regulations so that it can be collected through PAYE, using a reduced tax code. It is also included in the definition of tax liability, so that it could potentially affect payments on account and balancing payments.

There are concerns about how HMRC will be able to effectively administer this change. HMRC have written to taxpayers earning over £50,000 alerting them to the possibility of them being affected by this tax charge.

 

So should you continue to claim?

It is important to appreciate that Child Benefit itself is not being made liable to tax and the amount that can be claimed is therefore unaffected by the new charge. It can therefore continue to be paid in full to the claimant even if they or their partner have a liability to the new charge.

On the other hand Child Benefit claimants will be able to elect not to receive the Child Benefit to which they are entitled if they or their partner do not wish to pay the new charge. However, this will not affect the credit available (for state pension purposes) to certain people who stay at home to look after children (provided that an initial claim for child benefit has been made when the child is born.

An election can be revoked if a person’s circumstances change.

 

But I don’t receive a tax return?

It may well be that you and/or your partner do not currently receive a tax return but this may well change for 2012/13. Remember the need to tell HMRC by 6 October 2013 if you think a charge may be due.

 

Guidance

HMRC have issued some guidance on the charge and the options available which can be found at www.hmrc.gov.uk/childbenefitcharge/. This should be essential reading for many families.

 

How we can help

If you are unsure about anything to do with this charge or would like to discuss the matter further including how we might be able to minimise the tax charge which may apply to your family, please do not hesitate to contact us.