HUNDREDS of thousands of families face losing child benefit payments under new rules coming into force on 7 January that will see some parents handed surprise tax penalties.
The new high income child benefit charge (HICBC) will be applied where a taxpayer or their partner receives the benefit and at least one of them earns more than £50,000. With the onus on individuals to find out if they are liable, the potential for confusion and chaos is considerable. Anne Laverock, senior tax manager at French Duncan Chartered Accountants, offers tips on negotiating the changes.
What’s changing?
The current child benefit rates are £20.30 for a first child and £13.40 for each child thereafter. Under the forthcoming HICBC, tax will be charged at 1 per cent of total child benefit received for each £100 of adjusted net income (ANI) in excess of £50,000, with the benefit taken away entirely at £60,000. Letters have been issued by HMRC to households where the charge may apply. The charge may be collected through PAYE or the self-assessment tax liability.
Obvious anomalies
The HICBC could prove complex and produce unwelcome and apparently unfair results. For example, a couple each earning £49,999 will be entitled to full child benefit whereas a couple with one earning more than £50,000 and the other nothing will lose some or all of their child benefit payments.
Does marriage status matter?
In deciding whether the charge will apply, the parental structure in each household in receipt of child benefit will be considered. These include: a man and woman who are married to each other and not legally separated; a man and woman who are not married to each other but living together as husband and wife; a same sex couple who are civil partners and not legally separated and a same sex couple who are not civil partners but living together as if they were.
What if I’m not the parent?
If at least one party is receiving child benefit and at least one party is a high earner, then the charge will apply to the high earner.
Does it matter where the child lives?
Child benefit can be claimed by a person living with a child or by somebody supporting a child who lives elsewhere. If there is a high earner in the household where child benefit is being received then it is that high earner who is liable for the charge. If there is no high earner in that household, and the child lives elsewhere, then it is a high earner in the household where the child lives who will be liable.
How will HMRC know who’s liable?
It is the relevant high earner’s responsibility to declare their liability to the charge. If a parent does not know who the high earner is in the relationship, HMRC will provide limited information to assist.
Can I opt out?
The recipient of child benefit may elect to stop receiving it from 7 January and the tax charge will not then apply. This may mean the low earner stops receiving the benefit to prevent the high earner from having a tax charge. If income levels are likely to fall from over £60,000 to less than £60,000 from time to time, as is highly possible with the self-employed, then it may be best not to make the election but simply rectify the position with the tax charge. There may be a cash flow advantage to not making the election, but parents need to be aware that benefit received will simply need to be paid back later in the form of a tax charge. If the high earner does not usually complete a tax return then the tax charge could create an extra administrative burden.
What if things change?
If, having made elected to stop receiving the benefit and circumstances change, then it is possible to reinstate the benefit immediately. It is also possible to claim back benefit which was disclaimed but later proved to be receivable within two years of the disclaimer being made.
Can I reduce the charge?
Certain steps could be taken to mitigate the charge, but the cost of such measures needs to be weighed up against the amount of benefit being received and the potential tax charge. Simple steps like arranging the timing of pension contributions and gift aid payments can help. It may be possible to accept childcare vouchers from your employer instead of a pay rise. All these suggestions should be discussed with a tax adviser as mistakes could be costly.
Are there other reasons to claim?
It is very important that new parents claim child benefit, even if there is a high earner in the house. National insurance credits are awarded to those in receipt of benefits to ensure that their entitlement to state pension and certain other state benefits is maintained, even if they are not earning. These credits will continue to be applied to parents who have disclaimed benefit but only if the benefit has been claimed in the first place.