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Child Benefit Tax and Those Letters

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2 January 2013
By now hopefully you will have received the letter from HMRC regarding the withdrawal of Child Benefit Support for households where one party has an income of over £60,000. The new rules are effective from January 2013 and mean that there will be an income tax charge of 1% of the Child Benefit allowance for each £100 of Child Benefit award on income between £50,000 and £60,000. The charge means that those taxpayers with an income of over £60,000 will have a tax charge equivalent to the amount of Child Benefit.

For the current tax year, the amount of the Child Benefit brought in to the calculation will be that earned from 7 January 2013 to the end of the tax year. In later years it will be the Child Benefit received in the year.

The charge will apply if one member of the household has an income of over £50,000 and the one with the highest income will pay the charge.
A household is defined as:
  • A married couple living together;
  • Civil partners living together;
  • A man and woman, not married, but living together; or
  • A man living with a man, or a woman living with a woman, who are living together as if they were civil partners.
The arrangements are arguably not fair, in that a husband and wife could each be earning £49,000 and not be subject to the charge, but if a husband earns £65,000 and the wife has little or no income, because she is at home looking after the children, then they will be subject to the full charge. When was tax ever fair?!

The decision that has faced people is whether or not to
  • claim the Child Benefit; or
  • pay the additional tax at the end of the tax year and to answer, what some may consider to be, intrusive questions about their personal arrangements.

Many might have chosen the former to avoid the hassle, but the latter may well be more appropriate, because:

  • The Child Benefit effectively becomes a tax (and interest) free loan from the Government until the tax has to be paid;
  • If income in a year suddenly falls to below the limit a person may have opted out needlessly; or
  • A stay at home parent can receive a credit for NI purposes and so their entitlement to the State Pension, but to do so they must be receiving Child Benefit.
For the individual with two children, the tax charge on the Child Benefit on their income between £50,000 and £60,000 is equivalent to a marginal tax rate of 57.5%. If there are four children, this effective marginal rate increases to nearly 71.5%. This means that there needs to be careful tax planning for those with incomes around these levels.

For further information, please contact your normal Hazlewoods contact.