When does this start?
The new tax charge applies to child benefit payments received from 7 January 2013.
Will it affect me?
Yes, if you or your partner is claiming child benefit and either of you has adjusted net income of over £50,000. It can also apply where you have a child living with you and someone else is claiming child benefit for them.
What do you mean by partner?
This is your spouse, civil partner or someone you are living with as if you were married or in a civil partnership.
What do you mean by adjusted net income?
This is your total taxable income (earnings, benefits in kind, rents and all other investment income such as bank interest or dividends etc.) but adjusted for personal pension contributions and cash gifts to charities under the Gift Aid scheme.
What is the new tax charge?
It is really just a claw-back of some or all of the child benefit received. Once adjusted net income exceeds £50,000, the charge is 1% of the child benefit received for every £100 of income over that threshold. This means that once the income level reaches £60,000 there will be a 100% claw-back of the benefit received.
Can you explain that with examples?
Take a straightforward example of a married couple with one child. The wife claims child benefit of £20.30 a week, so this is £1,055 for a year. The wife works part-time and has income of £15,000. The husband works full time and his income is £75,000 so the total household income is £90,000. The full child benefit of £1,055 will be clawed-back by way of extra tax payable by the husband through his self-assessment tax return. Overall, therefore, the child benefit received by the wife is paid back to the government by the husband.
Contrast this with a married couple with one child with the same combined total income of £90,000. In this case, however, they each have income of £45,000. In this scenario, neither has income exceeding the £50,000 threshold so they will keep the £1,055 child benefit and will not be affected by the new tax charge.
Another married couple in similar circumstances might have income of £55,000 and £35,000 respectively giving the same combined total of £90,000. In this case, child benefit of £528 (half of £1,055 since £55k is half way between £50k and £60K) would be clawed back by way of extra tax payable through the self-assessment of the spouse with the higher income level.
Should I just stop claiming the child benefit?
For some, this will be the most sensible thing to do. If, for example, you are paying all your tax through the PAYE system and your income is never likely to fall below the £60,000 upper threshold, there is no point claiming benefit just to have to pay it back at a later date. Opting to stop receiving the benefit will, in these circumstances, also avoid the need to register for self-assessment and fill in an annual self-assessment return. There was some initial worry that stopping the claim could alter a mother’s entitlement to Home Responsibilities Protection for future state pension entitlement but HMRC have advised that this will not be the case.
For others, income levels will fluctuate and this will be particularly so for the self-employed. In these circumstances, it is likely to be better to continue to receive the child benefit but to bear in mind that the benefit may be clawed back through the tax return in due course. Self-employed people will already be within the self-assessment system so will be used to preparing annual tax returns. Their accountants, however, will need to be given much more personal information than they have been used to getting for annual tax returns. This new charge does not sit well with the fundamental principle of Independent Taxation for spouses which has underpinned our tax system for many years now.
How can I avoid the charge?
The simple answer to this is that the only option is to ensure that the adjusted net income of you and your partner is less than £50,000. For many, for obvious reasons, this will be undesirable. For some, however, there may be scope to keep within the income thresholds particularly in scenarios where income is from family companies, partnerships or trusts so that there will be some control over timing etc.
For companies where both husband and wife take salaries, the level of salary paid should be considered to see if there is scope to alter this and keep both spouses under the £50,000 threshold. Commercial reality aspects must, however, be borne in mind. If dividends are paid, the level and timing of payment will also need careful consideration. In partnership situations, profit sharing ratios should be reviewed.
It must be remembered that the charge is based on adjusted net income. Some will be able to take their adjusted net income below the £50,000 threshold by paying personal pension contributions (perhaps by way of salary sacrifice) or by making charitable donations under the Gift Aid scheme.
Take the scenario above where the higher earner has income of £55,000. This individual could make a net personal pension contribution £4,000 which is equivalent to a gross contribution of £5,000. This would neatly take the adjusted net income level down to £50,000 and there would be no need to suffer the £528 child benefit charge. For cash-flow reasons, however, this may be undesirable. A family with young children may feel that maximising pension provision is not a priority at this stage despite the tax advantages involved. Similarly, gifting funds to charity may not be uppermost in their minds since a charitable donation of £4,000 net would be needed to save the £528 tax charge in this example.
What do I need to do if I decide to stop claiming the benefit?
Only the person who is actually receiving the benefit can stop the payments – not the person who would suffer the tax charge unless that is one and the same. There is detailed guidance at www.hmrc.gov.uk/childbenefitcharge and a claim to stop can be made online. Alternatively, HMRC have set up a Child Benefit Helpline on 0845 302 1444.
Stopping the claim does not affect entitlement i.e. there is still an entitlement to the benefit even though it is not being paid. A child benefit claim form should still be completed for any new children to ensure that you do not lose out on potential National Insurance credits that may count towards your entitlement to State Pension and to ensure that your child is issued with a National Insurance number as they approach their 16th birthday.
Can I re-start the benefit again if circumstances change?
Yes, but only the person who is entitled to the child benefit can ask for the payments to be restarted and there will still be a tax charge if you or your partner’s income breaches the £50,000 limit again. You can restart your child benefit by completing the online form, calling the Child Benefit Helpline or writing to the Child Benefit Office. You can decide to start receiving the benefit payments again at any time and if you or your partner’s income drops below £60,000 for a full tax year, you can apply to restart your Child Benefit payments for up to two years after the end of that tax year. This provides a “safety net” for those whose income is difficult to predict in advance of completed accounts etc.
What problems are likely to arise in respect of this new tax charge?
There are likely to be many issues arising. The previous child tax credits debacles spring to mind and there is really nothing worse for families on a tight budget than to be given regular money only for it to be taken away at a later date. There will be problems with partners moving in or out of a household part way through a tax year and some partners will be unwilling to reveal the level of their income. This point has been acknowledged by HMRC who say that if you know your partner’s National Insurance number as well as their date of birth, HMRC will be able to provide some relevant information although they will not actually say how much he or she earns. An interesting concept in these days of data protection and Independent Taxation!