Are you one of the million?
Major changes to child benefit have now come into effect. Around one million families have received HM Revenue & Customs’ (HMRC’s) letter explaining the new high income child benefit charge (HICBC), which started from 7 January 2013.
The new HICBC applies if your income is more than £50,000 and you or your partner receives child benefit – but you could be subject to a charge where someone, who is not living with you, is claiming child benefit for a child who is living with you. If your income exceeds £60,000, the HICBC will be equivalent to the full amount of child benefit received. Where income is between £50,000 and £60,000 the charge is calculated as 1% of the amount of child benefit for every £100 of income above £50,000. For example, if income is £56,000 then 60% (£56,000 – £50,000 = £6,000/£100) of the child benefit will be clawed back.
You will have to declare the amount of the child benefit in your tax return if your income exceeds £50,000, although employees have the option of paying the charge using their tax code if less than £3,000 of tax is due. Where both partners have an income over £50,000, the person with the higher income must declare the child benefit and pay the HICBC.
For 2012/13, a person’s income for the whole year will be used to establish whether a charge applies, but the charge will just be on the amount of child benefit received between 7 January and 5 April 2013.
Income is after deducting trading losses (some special rules apply) and gross pension contributions – whether paid into a company scheme or a personal pension. For many people, additional pension contributions may be the only way of reducing income, ideally to below £50,000. If your income is between £50,000 and £60,000, and you have three children, then each £1,000 of gross contribution will save £645 (40% tax plus a HICBC reduction of over 24%). If the withdrawal of tax credits also comes into play, the saving could be more than 100%.
If your income exceeds £60,000, you may have decided to opt out of receiving child benefit payments to avoid self-assessment and having to pay the HICBC. But be careful if one partner has a low income; they should still make a child benefit claim in order to preserve their state pension entitlement, even though they receive no net benefit.