CHILD BENEFIT OR NO BENEFIT
Everyone who has an income of more than £50,000 and gets child benefit has big decisions to make in the next few weeks. If they make the wrong choices or do nothing they could find they pay more tax than they need to.
The new rules are designed to ensure that better off households do not gain from child benefit. Any household where one partner has a taxable income above £50,000 will pay extra tax to take back some of the child benefit. And if one partner earns more than £60,000 the extra tax will equal the child benefit – effectively taking it all back. The tax will be charged to the partner with the higher income.
The new tax starts from 7 January. If you and a spouse or partner you live with both have incomes of £50,000 or less you need not worry. There will be no change in your tax or child benefit. Six out of seven people are in that position.
But for the one in seven where at least one of the partners has a taxable income of £50,000 or more the extra tax will bite.
For an income between £50,000 and £60,000 the tax will be 1% of the child benefit for every £100 income above £50,000. So an income of £55,000 will mean that the tax is equal to 50% of the child benefit. And above £60,000 the tax is 100% of the child benefit. That could mean extra tax of nearly £2,500 to wipe out the child benefit for three children.
HM Revenue & Customs is writing to 1.2 million people who it thinks will be affected. They are individuals who have an annual income of more than £50,000 AND receive child benefit or who live with someone who gets child benefit.
The new rules apply to individual incomes not household income. That means a couple with a total income up to £100,000 a year may be exempt if they have £50,000 each. But a couple next door where one partner has an income of £60,000 will find they pay tax equal to their child benefit.
The tax is charged regardless of whose children they are. So a person on a high income who moves in with a parent and their children could find they are liable to pay extra tax to claw back the child benefit paid to their new partner for children they have no responsibility for.
The person who has to pay the tax will have to fill in a self-assessment form if they don’t do so already. HMRC reckons about 500,000 more people will have to do that.
What can you do to avoid it?
There are two things that may help. First, if your income is around £60,000 and you can reduce it below £50,000 then the tax will be avoided. One way of doing that is to pay extra into a pension fund or to take salary sacrifice to pay for childcare for example.
Second, the hassle of paying the tax can be avoided if the person who gets the child benefit chooses not to receive it. The tax charge will then be cancelled, though of course as a couple they will be no better off. This is only worth doing if one has an income above £60,000.
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