7th January 2013

The well publicised changes to Child Benefit were announced as part of the 2012 Budget.   From 7th January 2013 families where one parent earns more than £50,000 will be affected by the changes. 

What is Changing?

Child benefit will continue to be paid to everyone but higher-income families will have to pay back the child benefit through their self assessment return if they choose to keep receiving the benefit.

If you or your partner has an income over £50,000 a year you will start to pay more tax, but you will still continue to receive a smaller amount of Child Benefit depending on your income.  If your income is over £60,000 a year, the tax you will pay will cancel out the entire amount of Child Benefit you’re receiving.  

If both you and your partner have an income just below the £50,000 limit, you will still continue to receive the full amount of Child Benefit and will not have to pay any additional tax.  If both you and your partner have an income over £50,000, whoever has the higher income will have to pay the extra tax.

Income is generally the income before tax and the deduction of the ‘Personal Allowance’.  It includes everything you pay tax on, including wages, benefits in kind, profits from self-employment, savings interest, dividends or rental income.  Certain deductions are then made such as pension contributions, Gift Aid donations to charities and childcare voucher payments.  This is ‘adjusted net income’.

How is the extra tax calculated?

For those with an income of between £50,000 and £60,000 a year, the amount of extra tax that has to be paid will be 1% of the amount of Child Benefit received for every £100 of income above £50,000.   If income is more than £60,000, the amount of extra tax will be the same as the amount of Child Benefit the household receives.

Can you choose not to get Child Benefit to avoid paying extra tax?

You can choose not to receive any Child Benefit if you don’t want to pay the extra tax.  However, HMRC is encouraging you to fill out a Child Benefit claim form even if you choose not to actually receive any Child Benefit payments.   Filling the claim form enables you build up national insurance credits which protects your future state pension.  This is particularly important if you have stopped work to look after children full time.  It can also protect entitlement to other benefits such as Guardian’s Allowance and also ensure your child is automatically issued with a National Insurance number before their 16th birthday.  Completing the form will also make it easier for payments to start again if your circumstances change and income falls below the £50,000 limit eg if one person loses their job or the relationship breaks down. 

How will you pay the extra tax?

If you decide to continue receiving Child Benefit, you’ll have to fill in a self-assessment tax return.  If HMRC is aware you are likely to be affected, they will send you a tax return during April 2013.  This is when you will have to declare you were receiving Child Benefit and pay the extra tax, known as the High Income Child Benefit Charge.  If you haven’t already done so you will need to register for self-assessment and it is your responsibility to pay the extra tax, even if you don’t hear from HMRC. 

Can you continue to get Child Benefit but not pay the extra tax?

You may be able to avoid having to pay the extra tax and still receive Child Benefit by reducing your taxable income.  For example pension contributions are taken out of your income before you pay tax and using salary sacrifice you could opt to have some of your pay paid in the form of childcare vouchers which are also taken out of your income before tax.   

To discuss your options please contact:

Anne Fitzpatrick, Tax Partner. Email annefitzpatrick@mooneymoore.co.uk Tel: +44 (0) 28 9032 3466