Child Benefit, tax and self-assessment implications explained

You may have heard on the TV or radio, or read press reports, about the changes being made to Child Benefit.

Here is a brief outline of what is happening to Child Benefit and how you may be affected

Households where at least one person earns more than £50,000 per year will face a net reduction in the amount of Child Benefit they receive, and those households where one person earns more than £60,000 per annum will effectively lose all their Child Benefit.

Over the next few weeks, HMRC will be sending letters to all households where they are aware that one parent is earning over £50,000pa and where Child Benefit is being claimed.

There are bound to be families where their incomes have risen from below to above £50,000 but HMRC are not aware and as a result these families may not be aware of the changes. These families could be hit by a large and perhaps unexpected tax charge in future years.

The provisions come into effect on 7th January 2013.

Child Benefit is currently paid at the rate of £ 20.30 per week for the first child and then £ 13.40 per week for each subsequent child. A two child household stands to lose up to £ 1752.40 per year – equivalent to a pay cut of just over £3000 per year!

If one or more parents has income of over £50,000 per year then the amount of Child Benefit received will be affected. HMRC will be applying a new “tax” to claw back the Child Benefit.

Affected households can decide what to do from 7th January 2013, the options are:

•    Stop claiming Child Benefit altogether from that date in order to avoid the new tax charge

•    Claim the Child Benefit, but then pay more tax under self-assessment. The extra amount of tax will depend on income. The charge is 1% of the Child Benefit for every £100 of income earned over £50,000.

The first option is only advisable if one income exceeds £60,000. Although there is probably a good argument to continue claiming the benefit and then pay over the tax under self-assessment as the tax will be due on 31 January 2014 – so this could be an interest free loan for a year!

Anomaly
The system has one big anomaly in that two people in the same household who earn £49,999 pa each (joint household income of £99,998) will retain all of their Child Benefit, whereas a household where one person earns over £60,000 pa will lose all of their Child Benefit.

Any workarounds?
Since the claw back of Child Benefit is based around gross income (of the highest earner) then it makes sense to reduce the income for tax purposes as much as possible.

The popular route would be to make pension contributions (and you should speak to your own IFA on this matter). This reduces your gross income for tax purposes.

As an extreme example, if your income is £60,000 (so you’d lose all your Child Benefit) and you made a pension contribution of £ 10,000 your income would fall to £ 50,000. The pension contribution attracts tax relief at higher rates so you receive £4,000 tax relief so the net cost is now only £ 6,000 and you will also receive all of your Child Benefit. So the two child family would retain the £1,752.40 so now the pension contribution only has a net cost of £4,248.

How can I help?
Since these provisions come into effect on 7th January 2013, now is the time to undertake some income and tax planning.

HMRC estimate that about ½million people will now be required to complete self-assessment tax returns.

If you feel you are caught by these provisions, please contact me.

Calculator

There is a calculator available on the new Gov.uk website here. There are a few simple questions to answer and it will tell you how much tax you will have to pay if you are caught by these provisions.