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Child benefit meets the tax man

Posted in: Finance Last updated: 07 Jan 2013

In my last blog on this subject, I was mourning the changes to a benefit which has been vital to me and mine for over sixteen years. Up until January 2013, child benefit has been simplicity itself. It has been unhindered by means-testing, earnings and capital rules, not limited by any bureaucracy other than residence and immigration conditions, and consequently has achieved the highest take up rate of any UK benefit.

The Finance Act 2012

Child Benefit has also overwhelmingly been paid to women, who in turn have overwhelmingly spent it on their children. Including me. The Finance Act 2012 makes a change to the tax system by introducing a new High Income Child Benefit Charge. This is an income tax charge which will affect families where one person’s taxable annual income exceeds £50k. The charge will be 1 per cent of the annual amount of child benefit received for every £100 by which income exceeds £50k, and for people earning more than £60k the charge will be equal to the amount of child benefit received. For example, child benefit for two children is £1752 per year. For a taxpayer whose income is £54,000, the charge will be £700.80. For a taxpayer whose income is £60,000, the charge will be £1752.

The charge will only apply to child benefit payments received after 6th January 2013, and the earliest that the extra tax will be collected is during the 13/14 tax year, based on self-assessment forms which will be sent out in April 2013.

The options

Based on the conversations I have had with a wide range of parents, there are a few tricky questions to be resolved before anyone caught in the crosshairs of this new legislation can make a proper decision. There are only two basic options for those who already have children. The first is to keep child benefit which will continue to be paid in full every four weeks as normal. This option means that the higher earner will take the tax hit. Alternatively, you can elect to opt-out, i.e. not be paid child benefit but still retain your entitlement. For those with new babies or who are contemplating having children there is the question of whether or not to claim child benefit in the first place.

It has recently emerged that only 800,000 of the 1.1 million potentially affected families have been contacted prior to the passing of the opt-out deadline (which was midnight on 6th January 2013), so HMRC will probably offer some flexibility on the timing of any tax charge which arises due to opting out late. The deadline is not an absolute one – it just means that a tax charge is payable on any payment you receive after it. If you receive child benefit and want to opt out, you can do so here or call 0845 302 1444. You have to be the child benefit recipient in order to opt out, even if you are not the high income earner.

"This aversion is usually due a perception of the self-assessment form as being unbearably complicated or intrusive...."

Being paid child benefit, or merely retaining an entitlement to it (for a child under 12), will protect the claimant’s national insurance record for state pension. At earnings of between £50k and £60k, the tax charge represents only a proportion of your child benefit, as you can see from the example above. This means your household income will only drop by the amount of the charge. At £60k of taxable income the question becomes more debatable as the tax charge entirely equals the amount of child benefit in payment.

Self Assessment

It’s also worth remembering that entitlement to child benefit, whether underlying or real money, ensures the child is automatically issued with a National Insurance (NI) number before their 16th birthday. Parents who have never claimed child benefit may need to request a NI number for their child. However, I suspect that the real reason that legions of people are preparing to give up their child benefit, or are arguing themselves into not claiming it in the first place, is the daunting prospect of filling out a self-assessment form. The allergy is especially acute if they have spent many happy years on PAYE, never having had to go through the process.

This aversion is usually due a perception of the self-assessment form as being unbearably complicated or intrusive, but I can say that once you get to grips with it, the self-assessment form really doesn't bite. It may take several evenings of proverbially bashing the calculator, but surely it's worth it if it keeps you entitled to some child benefit?

Another common issue being raised is around what happens if it turns out that the claimant or partner was not actually liable to pay the charge, i.e. doesn't actually earn over 50k? This situation could arise, for example, if a self-employed person had an unexpected large expense which reduced their gross income. For those on PAYE, it may turn out that a larger than usual contribution towards a pension scheme reduces the final figure which appears on the P60 form. The answer is that if the claimant has chosen to stop receiving child benefit but has retained the underlying entitlement, then this decision can be revoked within two years of the end of the tax year and child benefit can be reinstated.

On the HMRC websites, there is a new online facility for people to stop and re-start their child benefit claims. As financial advisers find viable ways to reduce gross pay, the stop-start option may be a sensible one.

Individual circumstances

Stress within a couple may arise simply from the HMRC’s requirement that the higher earner reveal if their partner receives child benefit. For those who are affected, this represents the end of individual taxation, but families claiming tax credits will be accustomed to making full disclosure about household income.

Fluctuations in income or coupledom may also cause anxiety or stress and so keeping hold of child benefit may be the better option if you know your circumstances are likely to change. So, even if you think there are compelling reasons to give up child benefit, whether it is to avoid the scariness of the self-assessment form, the fact that your accountant may charge more to fill it in than you will save in child benefit. In this age of austerity, for some people it may be as well to wait to see how their income unfolds before giving up a claim. As for me, HMRC holds no terrors, my accountant's fees are reasonable, I've confessed to my husband that, yes, the CHB going into the account doesn't stand for anything illicit, and I'll be using mine for essential stuff for my son, even though he's taller than me and has expensive size 10 feet.

Note: Whilst we take care to ensure Hub content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decisions. OneFamily do not provide advice so it may be worth speaking to an independent financial advisor about your own circumstances.