Child Benefit Charge

Introduction

You will probably be aware that from January 2013 the Government is implementing the Child Benefit Charge for those with “high” income. This will mean that Child Benefit will effectively be withdrawn gradually from those where one parent/child carer or their partner has taxable income of more than £50,000, and withdrawn entirely from those families where taxable income of one parent/child carer or their partner is more than £60,000 per annum.

HM Revenue & Customs should shortly be sending out letters outlining the position and should it apply, the options available, which will be to withdraw from receiving child benefit completely or suffer the above tax charge.

This charge applies to the highest earner of a married couple, civil partnership, or those living together as if married or in a civil partnership. It also applies to someone who receives a financial contribution towards the upkeep of a child from a non household member, who receives child benefit for that child.

The details

Child benefit is currently paid at the rate of £20.30 per week for the first child and £13.40 per week for each additional child, i.e. £1,056 annually for one child, £1,752 for two children and £2,449 for three children, etc. The tax charge is 1% of the child benefit received for every £100 of taxable income between £50,000 and £60,000. As the charge is a percentage of the actual child benefit received, the effective rate is much higher than the 1% headline rate and varies depending upon the amount of child benefit received. Where child benefit is received for one child for the whole year the effective tax rate is 10.56%, two children 17.52%, three children 24.49%, etc. These rates will be effected where child benefit claims start or end in a particular year and/or marriages, civil partnerships and their equivalent start or end in a particular year. For 2012/13 the effective rates will be reduced by three quarters as the child benefit charge does not commence until January 2013.

Parents/child carers will need to ascertain if one or both spouses etc earn over the thresholds noted above and if so which individual has the higher level of income. Income included for this purpose is not just salary, but dividends, benefits in kind, income from properties including holiday homes, self-employed earnings, interest, pensions and any other taxable income. Pension contributions made and gift aid payments may however be deducted.

Tax returns

Anyone affected by the charge will need to complete a tax return to declare the resultant liability to HM Revenue & Customs. This may not be the person receiving child benefit but their partner if they have income at a higher level. They may be in employment and only have PAYE income but they will now need to complete a return to comply with this legislation, where they are not already doing so. If you do not share your financial details with your spouse etc it may be difficult to ascertain if there is any claw back or completion of a tax return required. If this applies please let us know accordingly.

Should you stop claiming the benefit?

If one taxable income is over £60,000, then to avoid the Child Benefit Charge and cost of making tax return entries, Child Benefit can be disclaimed, but this can have other consequences. If child benefit is simply not claimed then the Class 3 NI credit (Home Responsibilities Protection) is lost but if the benefit is claimed and then an election is made for all payments not to be made then the NI credits should continue. Note that elections made not to receive Child Benefit can be revoked (and backdated up to two years) if they subsequently prove not to be beneficial. If you believe an election not to receive Child Benefit may be appropriate for you/your spouse etc then please let us know as soon as possible.

Action required

The new tax charge starts from 7 January 2013 in the tax year 2012/2013 which ends on 5 April 2013. If there is a requirement to complete a tax return for an individual who is not already in the self-assessment system this needs notifying to HM Revenue & Customs by 5 October 2013. For all cases it will be necessary to determine whether a Child Benefit Charge applies and if so to whom. It is therefore important that 2012/13 tax return information is provided as soon as possible after 5 April 2013.

There are potentially more complications with this new tax charge, not least exactly how the details will be included on tax returns and whether such details will need to be included for all taxpayers or only those taxpayers with income over £50,000 or just those liable to the charge.

To help us identify those clients potentially affected we would be grateful if you would download. complete and return this form to ensure that we will be completing your tax return correctly, and identify any requirement to complete one for your partner. Child Benefit Charge Form

Please contact us should you wish to discuss this in more detail.