Child benefit can be a vital resource
All over the country, parents are swapping playdates with friends, and enlisting the help of family to provide cover during the long weeks of July and August – and time planning is not the only consideration, as the cost of additional weeks of expensive childcare has to be factored into the summer holiday budget. At a time when family expenditure has to cover so many demands, child benefit has always been a vital resource.
As a parent of older teenagers, I have benefited from years of claiming the last remaining ‘universal’ benefit, and I’ll be sad to see it disappear into the swirling vortex of the income tax regime. I wish I’d had the self-discipline and financial flexibility to copy my friend’s bright idea, which was to pay all child benefit, from day one, into an untouched account in the children’s names – by the time her children get to 18, any student loan is likely to be greatly reduced! I always seemed to need mine to plug a gap in the household budget, or, yes, spend it on the kids.
After a great deal of speculation about the Government’s plans, we finally have clarity regarding how the child benefit scheme will be affected from January 2013, and the likely impact on families where there is at least one high earner.
After much uproar and debate, the decision is now that there will be an 'income tax charge' levied on the higher earner, where at least one parent (either a lone parent or in a couple) has more than £50,000 of taxable income.
There is widespread misunderstanding of the way the new rules are going to work, with most people believing that Child Benefit will stop completely from January 2013 in families with a high earner. NOT TRUE!
How the new system will work
Here is a summary of how the new system will work:
- It will be applied to any families in which at least one person has taxable income which exceeds £50,000 – combined or household income is irrelevant.
- Child benefit itself can still be claimed and the money paid out to families whatever the level of income, but…
- ...The higher earning person will effectively pay it back via an income tax charge.
- The tax charge will be equivalent to paying back 1% of child benefit for every £100 of earnings over £50k by the time an income level of £60k is reached Child Benefit will have been completely ‘paid back’.
- For example, someone earning £54,000 a year and receiving child benefit for one child at £20.30 per week would lose 40% (£8.12) of their child benefit in tax a week.
- If either the claimant or partner has taxable income over £60,000, the tax charge effectively cancels out the child benefit altogether.
- The higher earning partner will be the one who is liable for the charge and will have to complete a self-assessment return at the end of the tax year.
- The new rules will generate about 500,000 new self-assessment returns, and the tax charge for the 2012-2013 tax year (i.e. from January 7th until the end of the tax year) will not be payable until the 2013-2014 tax year.
- HMRC will be writing in the autumn to everyone likely to be affected, and there will be clear instructions then about what to do.
Points to note:
1. If the new rules are going to affect you, then you may be tempted to stop claiming Child Benefit altogether if your partner falls into the £50-£60k bracket in order to avoid the charge. But if you yourself are not working, and have a child under 12, then you will be credited with class 3 national insurance contributions to protect your pension if you are claiming child benefit and the Government have announced that this ‘perk’ will last until the child is 12-years old.
2. It may be a good idea for the higher earner to seek some financial advice especially if they are near the £50,000 threshold. I’m no tax expert, but paying increased amounts into a pension may be worth investigating as one way of reducing the amount of taxable income.
3. Be prepared for some complexity in this: for instance, if whoever is the higher earner changes from year to year, then whoever has to pay the charge may keep switching too. You’ll need to keep your financial details pretty organised.
4. For single parents who separate part way through the tax year, the eligible parent will only be liable for the new income tax charge for the period up to the date that you split up, and not for the full tax year on 5th April.
5. If you joined your partner part way through the tax year you will only be liable for the new income tax charge from the date that you started living together and not from the beginning of the tax year 6th April.
These new rules and the plans for clawing back can become complicated, so you may want to check with a financial advisor or you can find more information on the HMRC website.
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.