TT181: High Income Child Benefit Charge

The Government has introduced a new and controversial charge which effectively claws back child benefit – called the “High Income Child Benefit Charge”.

This will apply from the current tax year 2012/13, coming into effect from 7 January 2013.

 

Who is Likely to be Affected?

The charge will be applied to taxpayers whose income exceeds £50,000 in a tax year and who is in receipt of Child Benefit and to taxpayers whose income exceeds £50,000 and whose partner is in receipt of Child Benefit.

In the event that both partners have an income that exceeds £50,000, the charge will apply only to the partner with the highest income.

 

 

The Charge

The amount of the tax payable in a tax year can be equal to the total amount of the child benefit received for that year (though of course the child benefit might be paid to a wife whilst the tax charge might fall on a husband as the principal earner).

An individual is liable to the charge if their adjusted net income for a tax year exceeds £50,000 and they or their partner is in receipt of child benefit during the tax year.

Adjusted net income is an individual’s gross taxable income less any gift aid and pension contributions.

 

The Practicalities

It is possible to avoid the charge altogether by electing not to receive child benefit. Such an election can be revoked at any later time, and in certain circumstances such revocation can be back-dated. A taxpayer may choose to make such an election if his or her income is at a level which would result in a full clawback of all child benefit.

New claimants will be told about the new high income child benefit charge when they make their claim, to enable them to decide whether to make an election not to receive the child benefit and avoid the charge.

Child benefit should be claimed, normally when a child is born. Making the claim, even if the parents plan to elect not to receive the payments, is important as it allows the parent to obtain the National Insurance credits for state pension entitlement. It also guarantees that the child will be issued with a National Insurance number once they reach the age of around 15.

Where an individual is liable to the charge, but does not currently file tax returns, the tax charge can be collected through their PAYE tax code.

There are complicated rules for determining who is liable for the charge in cases where the child does not live with the claimant
Similarly, the definition of a “partner” means that it may be possible to cause a charge to arise unknowingly! If for example, a high income earning boyfriend moves in with his girlfriend who happens to be a single mother, it may trigger a charge on him!

There may be opportunities to plan to mitigate the charge. For example, for those able to decide when to take earnings, or when to claim reliefs, one might be in a position to reduce the adjusted net income to under £50,000.

As always, if you think you may be affected by this change, please do contact a member of the Barnes Roffe tax team.

 

Example

Harry has adjusted net income of £58,500 in 2012/13 tax year. He lives with his wife Sally, whose adjusted net income is below her husband’s income. Sally receives child benefit for their two children, £20.30 a week for the first child and £13.40 a week for the second. Therefore, from 7 January 2013 (and up to the end of tax year 2012/13) she receives:

  • First child £20.30 x 13 (weeks) = £263.90
  • Second child £13.40 x 13 (weeks) = £174.20
  • Total £438.10 rounded down to £438
  • Percentage charge £58,500 – £50,000/100 = 85%

Harry is liable to tax of £438 x 85% = £372.30. 85% of the Child Benefit received by Sally is thus clawed back by way of tax charge on Harry.

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