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Families in receipt of Child Benefit, where someone in the household earns more than £50,000, will soon receive a letter from HM Revenue & Customs (HMRC), outlining the new "high income Child Benefit charge" (HICBC), which comes into force on 7 January 2013.
Introduced by the 2012 Finance Act, the HICBC will be imposed on a taxpayer who has income of over £50,000 in a tax year, if they or their partner are in receipt of Child Benefit. Where there’s more than one person in a household with income over £50,000, the charge will apply to the person with the higher income, even if they’re not a natural parent of the child in question, and regardless of whether they’re the recipient of the Child Benefit.
“Partner” will include a spouse or civil partner, or simply someone with whom you live as if you were married/civil partners.
The charge, which will be applied through the self-assessment tax return system, will be 1% of the Child Benefit award for each £100 by which “adjusted net income” exceeds £50,000. All the Child Benefit is therefore withdrawn once income reaches £60,000.
“Adjusted net income” is total income (including salary, dividends, rental income, self-employed earnings, savings income, and pensions) before deduction of personal allowances, but after taking into account pension contributions and Gift Aid donations. Interestingly, the HICBC applies in steps of £100, but as this is rounded down rather than up when calculating the tax due, the starting point is actually £50,099.
As the charge applies from 7 January 2013, the first tax liability could arise in relation to the current tax year on Child Benefit paid between 7 January 2013 and 5 April 2013, with the tax due being payable by 31 January 2014 (or, if the total liability for the year is less than £3,000 and the return is submitted before 30 December 2013, through the PAYE tax code number).
For a taxpayer earning £65,000 with three children, the self-assessment tax liability for the latter part of the year to 5 April 2013 would exceed £600. For those with more children, this amount continues to grow and although the charge for those with income between £50,000 and £60,000 or with fewer children may be lower, they will still feel the pinch. Using current rates, the following example demonstrates the impact in 2013-14 and later years:
In 2013-14, Mr Kidd has an adjusted net income of £54,000 and he and his wife have two children. Mrs Kidd doesn’t work and claims Child Benefit of £1,752 for their children. Mr Kidd realises that a HICBC will apply, and that a 40% charge (£54,000 - £50,000 = £4,000/100 = 40%) will be applied against the benefit his wife receives. This results in a tax liability for him (as the highest earner) of £700.80.
A couple of years on, and Mr and Mrs Kidd have had twins. Mr Kidd’s 2015-16 adjusted income is £63,000 and Mrs Kidd now claims Child Benefit of £3,146 for four children. As all of the benefit will be clawed back as a HICBC for the year, Mr Kidd will have a tax liability to meet of £3,146.
HICBC produces very aggressive marginal tax rates where income exceeds £50,000. The “headline” rates most likely to feature are as follows:
While these are bad enough for most, spare a thought for the family with eight children, where the marginal rate of tax would be 101.3%!
The letter being issued by HMRC to over 1 million families will refer to “your own or your partners’ income” as part of the process of establishing whether the HICBC will apply. However, not all couples will necessarily wish to discuss their respective incomes. We understand that HMRC will attempt to address any issues on this front, while maintaining taxpayer confidentiality, by providing only a minimum amount of information necessary for someone to establish whether they or their partner has the higher income. They plan to provide a form for Child Benefit recipients to disclose their own income to HMRC and will simply advise whether that person’s partner's income is higher or lower than their own.
Easy as 1, 2, 3?
All taxpayers affected by the charge will need to declare their liability through their self assessment tax return. HMRC estimate that up to 500,000 taxpayers who don’t currently complete a self assessment return could be liable, and will have to complete a return for 2012/13 and subsequent years.
Don’t forget that only £1 of income over the lower limit will result in an income tax clawback which may be nominal, but could carry with it the administrative requirement of registering for self assessment and completing a tax return. Completing a return for the first time may be a daunting task for some, and will bring them in to the self assessment regime, which carries considerable penalties for non-compliance. If income levels fluctuate, the HICBC may be relevant for some years and not others, and it may not always be clear who is actually liable to pay the tax from one year to another.
Where a person earns more than £60,000, they may prefer to elect not to receive Child Benefit, to prevent the inconvenience of a HICBC. The election must however be made by the person entitled to the benefit, even if they're not the one who would suffer the tax charge.
An election takes effect from the following week, and can be revoked at any time, reinstating Child Benefit for the week following the revocation, and for up to three months earlier, if appropriate.
If an election is made not to receive the benefit for a tax year, but income for that year turns out to be below £50,000, the election can be revoked up to two years following the end of the tax year, thus reinstating the Child Benefit for the year in question. Many couples will be inclined to make the election not to receive the benefit, avoiding the need to lodge a self assessment tax return, and retaining the ability to review the position later. There are indications that HMRC will also allow the same treatment where income levels fall between £50,000 and £60,000 for the year in question.
Claiming Child Benefit can create eligibility for the state pension by way of a national insurance credit. It also means that the issue of an NI insurance number to the child will be automated once they reach about 15 years of age. Therefore, taxpayers who do not currently receive the benefit but become eligible in the future and who are considering an election should ensure that they do claim the benefit in the usual way and then elect to receive a nil award, so as to preserve this protection.
Time to panic?
Not necessarily! By taking sound tax advice, there may be ways to structure your affairs so that any HICBC is minimised. The following are some scenarios that could be considered:
Initially, HMRC are writing to people they believe will have income in excess of £50,000 in the current tax year and who might therefore be liable to pay the charge, using their existing records, and details of Child Benefit claimants at the same address. No doubt some people who receive a letter may not in fact be liable to pay the charge whereas some people who will be liable may not receive a letter. However, the onus to notify HMRC of a liability remains with the individual.
The cumulative cost for a family with three children who stand to lose all their Child Benefit could be as much as £50,000 by the time their youngest is 18 – potentially more than a year’s net salary – so it’s important that you check now. HMRC have provided a Child Benefit tax charge calculator, which can be found at https://www.gov.uk/child-benefit-tax-calculator to assist in calculating the potential impact of the new rules.
We’re not always aware whether our clients are currently claiming Child Benefit, but if you think your family will be affected by the new rules, it’s important that you get in touch with us. By reviewing your situation, we can help you decide what to do, and consider whether any tax planning is required to ensure the best outcome. If you have any concerns in relation to the HICBC and how it might affect you, please speak to your usual Springfords contact. Of course, if you’re not already a Springfords client, please feel free to contact Fiona Donaldson or Ian Haynes for more information on how we can help.