Child Benefit Withdrawal

Sorry – this is a long post, but important, so please bear with it.

As part of the reforms to the welfare system, from 7 January 2013, Child Benefit will be withdrawn from households that include certain high earners.

You would think that a withdrawal of a benefit would mean that less money was paid out across the population, but that’s not so in this case.  The full amount of child benefit will continue to be paid out to a household, but if either taxpayer in that household has an ‘adjusted net profit’ greater than £50,000 then a proportion, if not all, of the benefit will be claimed back by way of a tax charge.  This charge is referred to as the High Income Child Benefit Charge (HICBC).

The charge will be applied to a household on the income of a taxpayer that earns over £50,000.  If both partners earn over £50,000 then the tax charge will be applied to the higher earner.

The tax charge will apply at a rate of 1% of the full Child Benefit award for each £100 of income between £50,000 and £60,000.  The charge on taxpayers with an income above £60,000 will be equal to the amount of Child Benefit paid.

For example:

Child benefit for one child for a year is £1,055.

If a tax payer earns £56,000 then the charge will be 60% of £1,055 = £633, the 60% being £56,000 – £50,000 = £6,000/100

Tax payers that earn over £60,000 can opt to not receive Child Benefit so that they do not have to have the charge applied to their income.

On the face of it this sounds fairly straightforward, until you start to consider various scenarios that could arise, especially for self-employed people whose income can fluctuate from one year to the next.  The many scenarios cannot all be covered here but below we have listed some of the main issues that we hope our clients will bear in mind, so that we can best advise them in the future:

  • If someone earns over £50,000 p.a. but is with a partner with children for only part of a tax year (either at the beginning or end of a relationship), then the full income for the year is used to determine whether the charge applies, even though the charge will only apply to the period when the partners were living together.
  • Similarly, as the charge comes into being on 7 January 2013, then the first charges will apply only to the period 7 January 2013 to 5 April 2013.  However, the calculation that determines whether the charge applies will take into account partners’ incomes for the whole of the 2012/2013 tax year, if they have been together for the whole of that year.
  • Where both partners have to complete tax returns, they will nearly always be in a position of never knowing which one may or may not be charged until the rest of their returns have been completed after the end of the tax year.  As most partners have their returns completed at the same time this may not cause any great problems, but where partners do not normally disclose this information to each other, or where partners use different accountants, this could cause issues.
  • In many circumstances one partner has employment income and is taxed through PAYE, and quite often has a steady income, whilst the other partner is self-employed and whose income can fluctuate from year to year, sometime being higher, sometimes lower, than their partner’s income.  In a situation where the employed partner earns the higher income during a tax year they need to inform HMRC by 6 October following the tax year in question.  Failure to do this could result in a 30% penalty.

The above are just a few of the most likely situations that might arise and catch clients out.  How the application of this charge will unfold over time is yet to be seen, though it is generally anticipated that it’s not going to be plain sailing.

We accountants like to plan ahead for our clients.  Unanticipated changes in personal and domestic circumstances could upset some great tax planning.

Some scenarios will cause us all some head scratching

Either way, taxpayers will need to get used to the fact that their accountants will have to start asking questions regarding their personal life and domestic situation that we have not had to ask in the past.  We would much rather not have to, but at least for the foreseeable future it appears that we are all going to have to get to know each other a whole lot better.

Image courtesy of

This article was compiled by Deborah Bradley, Client Manager at Balance Accountants.

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