If you get child benefit and you or your partner has an income over £50,099 a year some or all of your child benefit will be taken back in extra income tax. It is called the Child Benefit High Income Charge. bThe rules are complicated and may seem illogical and unfair.
The tax charge began on 7 January 2013. No-one has their child benefit itself taken away. Instead the partner with the higher income pays an extra income tax charge. If their income in a tax year is £60,100 or more the tax charge will equal the child benefit. For a household with three children – child benefit is worth £2,449.20 a year. So the extra tax will also be £2,449.20. It will be collected through self-assessment. If you do not already fill in a self-assessment form you will have to in future. The Revenue now estimates that an extra 350,000 people will have to fill in a self-assessment form as a result of the charge.
If the partner with the higher income gets £50,100 to £60,099 a year the tax charge is less than the child benefit. It will be 1% of the CB for every £100 by which income exceeds £50,000. So if income is £55,000 the tax charge is 50% of the CB. For a household with three children that would be £1224.00. Work out the charge for 2012/13 or 2013/14 on the official calculator https://www.gov.uk/child-benefit-tax-calculator/main
The charge is assessed on the partner with the higher income. If one partner has an income of £60,100 and the other partner has no income then the full tax charge will be made and every penny of the Child Benefit will be taken back in tax. On the other hand if both partners have an income of £50,099 no charge is made even though their household income is over £100,000.
Paying the charge
The charge began on 7 January 2013. If it applies to you for 2012/13 then you will need to inform HMRC by 5 October 2013 and register for online self-assessment and submit your form online by 31 January 2014. It will be charged pro rata for the three months of the tax year 2012/13. If you are en employee and the total amount due under self-assessment is £3000 or less then it can be paid through your tax code. The full charge itself will be more than £3000 if you have four children or more.
If you miss the 5 October deadline then HMRC may charge a penalty as well as the tax when your self-assessment is worked out. The penalty can be up to 100% of the tax due on the child benefit. However, if you begin the process of registering by 5 October no penalty will be charged. If you miss that deadline but are helpful and cooperative then a smaller penalty, perhaps none at all, will be charged. You can appeal against the penalty.
HMRC estimates that 1.1 million people will be subject to the charge. It identified about 800,000 of them and wrote them a letter explaining the charge before it began. HMRC failed to find the other 300,000. If you did not get a letter but believe the charge may apply to you, then you must contact HMRC by 5 October 2013.
If your first child was born after 5 April 2013 then the charge only applies for the tax year 2013/14. You can choose not to claim child benefit for the child. Otherwise you will have to pay the tax charge. You will need to register for self-assessment by 5 October 2014 and pay the charge through self-assessment which normally must be submitted and paid by 31 January 2015.
If someone who gets CB lives alone then it is their income which is assessed. If they live with another person as husband and wife or as civil partners the partner with the higher income is assessed and – if their individual income is more than £50,000 – charged. It does not matter whether two people are married or in a legal civil partnership or a same-sex marriage. If they live as if they were in one of those relationships then they are counted as partners. And it does not matter whose children the child benefit is paid for.
This rule can lead to anomalies when relationships begin and end.
Amanda Smith is divorced and has two children. She earns £35,000 a year and gets £1,752.40 a year in child benefit. Her income is below £50,099 so the tax charge does not apply to her. She meets Charles Wright. After a few months they start living together. He earns £61,000 and has to inform HMRC and pay the extra tax charge of £1752.40 even though the children are not his and he contributes nothing directly to their upkeep. On the other hand their biological father James Smith, who pays maintenance for his children, and who earns £95,000 a year, pays no extra tax.
The rules about living together are the same as those used for tax credits. If two people have a relationship but have two separate homes HMRC can still decide they are living together as partners.
Marginal tax rates £50,000 to £60,000
A person liable to the charge whose income is between £50,099 and £60,100 faces very high rates of tax on each extra pound they earn. They pay income tax at 40%, National Insurance at 2%, and then the child benefit charge. If there are three children that charge is 24.5%. That means for every extra £100 they lose two thirds of it to tax and keep just £33.50. If they have a student loan and pay the graduate tax of 9% they will keep less than a quarter of any extra earnings, losing £75.50 of every £100 to tax.
The more children there are in the household the higher the child benefit tax. If there is one child it adds 10.6% to the tax rate. For two it is 17.5%, three children is 24.5% and four adds 31.5%. Five children adds 38.4%. If there are eight children it is 59.3%, taking the total tax take to more than the money earned. For every £100 earned the total tax is £101.30. And if graduate tax is paid then a partner in a seven child family will pay £103.40 on every £100 earned. In other words they will be better off not earning the extra money.
The child benefit tax charge means that anyone with even one child and an income between £50,099 and £60,100 will pay a higher marginal rate of tax than someone with an income of £1,000,000. Everyone with even one child will pay at least 52.6% in tax for each extra £1 earned. That is a higher rate than the 52% income tax and NI charged in 2012/13 on those with an income above £150,000. That rate was cut to 47% from April 2013 in order to boost incentives among high earners to earn more. But the marginal rate for those on £50,000 to £60,000 with children is much higher and will not be cut.
The income which is assessed is called ‘adjusted net income’ though in fact it is more like gross income before tax. It is your total taxable income from all sources including earnings, rent, dividends, and savings interest before any tax allowances are deducted. However, you do adjust it by deducting pension contributions, gift aid donations, and salary sacrificed for child care vouchers or a cycle to work scheme. So someone who earns £60,100 and would face the full 100% tax charge could pay £10,001 gross into a pension scheme and avoid the charge altogether. As most of the contribution would be tax relief that would be a very good deal. You can check your net adjusted income using the official calculator https://www.gov.uk/child-benefit-tax-calculator/main
Avoid the charge
You can avoid the tax charge and the hassle of self-assessment if the person who gets the child benefit tells HMRC they do not want to receive it. The child benefit will stop and the tax charge will not be due for subsequent tax years – though if any child benefit is received in a tax year (6 April to next 5 April) then the higher earner will still have to be in self-assessment and pay the tax on the child benefit received for that year.
Although child benefit is not received, entitlement to it will continue. So it can be reinstated if circumstances change and National Insurance credits will continue to be available for the person entitled to it. Those credits build up entitlement to state pension if National Insurance is not paid at work.
Giving up child benefit should not affect a current or future entitlement to widowed parent’s allowance as you will still be ‘treated as entitled’ to child benefit even if your late spouse/civil partner or you have given it up.
If you give up child benefit but it turns out that the tax charge is not due you can reclaim it for up to two years.
Giving up child benefit is only sensible if the higher earner has an income well above £60,100 and the relationship between them and the person entitled to child benefit is stable. Even then there are good reasons for keeping the child benefit. It can be put into a savings account where it will earn interest and the money in the account can be used to pay the tax charge up to 21 months later leaving a small profit on the interest. If the account is an ISA no tax will be due on the interest.
The Revenue estimates that about 400,000 people have given up their child benefit to avoid the tax charge.
This brief guide covers the basics. Always get advice and study official documents before making changes in personal circumstances. HMRC has comprehensive but hard to follow information on its website http://www.hmrc.gov.uk/childbenefitcharge/index.htm