I have to admit that my heart sinks every time I have to look at the rules for entitlement to tax credits such as child tax credit or working tax credit. Why? The answer is that these are really social security benefits and having “tax” in the title is a bit of a red herring. The UK social security system is notoriously complicated and there can be nothing worse for a family on a tight budget than to receive regular money only to be told at a later date that they are not, in fact, entitled to it and must pay it back. Many tax credits debacles have been reported over the years and the problem is that claims have to be made in advance when actual income figures are unknown. This will not cause difficulties for people with income levels that do not fluctuate from year to year, but what about the self-employed or those with their own companies who want to see how well the business does before setting salary/dividend levels?
The tax credit system is old news now and despite its complications and uncertainties, it seems to be here to stay. Now, however, I cannot help but think “here we go again” with the introduction of a new tax charge to withdraw child benefit (worth £20.30 a week for the first child and £13.40 a week for every sibling – all tax-free) from families where one member of the household has adjusted net income of more than £50,000. Each of these terms warrants further explanation. First of all, child benefit will not actually be withdrawn. It will continue to be paid, usually to the mother, unless the claimant opts out. Opting out could, however, have an impact on future state pension entitlement as Home Responsibilities Protection is currently available to claimants of child benefit while the child is under 12 years old.
Household is defined as married couples, civil partners or couples living together as if they were married or civil partners. If a member of the household breaches the £50,000 income threshold, the tax system will be used to claw-back the benefit with a new tax charge. This will be collected initially through PAYE (another complication to the already complicated PAYE coding system) but with final adjustments through the annual self assessment tax return. It is estimated that this will mean that around 500,000 tax-payers who are not currently within the self assessment system will now be required to file returns.
The tax charge will be 1% of the child benefit received for every £100 of income in excess of the £50,000 threshold. Once income reaches £60,000, therefore, the tax charge will be 100% and the full child benefit received will be clawed-back. The new charge will take effect from 7 January 2013 i.e. during the current tax year. There will be planning points to consider as adjusted net income will take account of pension contributions and Gift Aid donations, making the tax relief on these even more attractive. It will pay to do the sums when income is around the claw-back threshold.
As far as practicalities are concerned, aside from the obvious unfairness (a couple each earning £49,000 will suffer no claw-back whereas a couple with only one earning £51,000 will be affected), there is the mismatch that the tax system has, for many years now, been based on the fundamental principle of Independent Taxation for spouses. This new tax charge can result in a claw-back from one individual in respect of a benefit paid to another. It is not unusual for couples to want to keep their finances separate and accountants will now have to ask for personal and financial details that have not in the past been relevant to the tax return completion process.