Child Benefit Changes

From 7 January 2012, high income recipients of Child Benefit face the prospect of repaying all or part of the benefit in additional tax.

The charge, known as the high income child benefit charge, applies where there is one high earner in a couple. A high earner is defined as an individual earning more than £50,000. The tax charge claws back Child Benefit at the rate of 1% of the benefit for every £100 of additional income, hence the full benefit is clawed back at £60,000. It creates yet another unwelcome layer of complexity in the tax system and a further income range where an increase in income comes at a particularly high rate of tax. For example, an employed high earner with two children will face a tax rate of 59.5%.

HMRC are allowing individuals to opt out of the Child Benefit system to escape the administrative burden of the charge however for those with incomes between £50,000 and £60,000, opting out will mean losing out on some Child Benefit. Some commentators view the Child Benefit as an interest free loan from the government for between 10 and 22 months and recommend not opting out. Our view is that this very much depends upon the couple concerned. Whilst financially it would be better to invest the money on deposit until HMRC claw it back, albeit marginally given the paltry interest rates that we are experiencing, we are finding many people simply want the certainty these days. If there is the risk that the Child Benefit would be spent as it always has done – will a tax charge really be appreciated? In any event, with income between £50,000 and £60,000 the clawback can hardly be certain and it would be unwise to opt out provided that proper budgeting is performed for the eventual payment.

The charge is clawed back through the self assessment system. All individuals have a legal requirement to notify HMRC of an additional source of income before the 5 October after the end of the tax year. If subject to this high income tax charge, then HMRC will need to be notified. Our understanding is that HMRC will be asking for a self assessment tax return from all involved. Given the number of tax code errors we continue to see, this also allows an annual check up of the tax position.

The good news is that, in certain situations, finances can be rearranged to lower the clawback. There are certain situations however where it will pay dividends to talk in detail about financial plans, for example cashing in investment bonds at a gain. Whilst these are “top-sliced” so that higher rate tax payable is spread over the time the bond has been owned, any gain is treated as income in that year to determine the amount of child benefit to be clawed back.