High income child benefit charge
The ‘high income child benefit charge’ comes into effect from 7 January 2013. The charge is based on the adjusted net income for 2012/13, so the final charge is not known until after the end of the year. For self-employed individuals the charge may be based on their current earnings.
The new tax is an income tax charge to ensure that child benefit is effectively removed from persons with income in excess of £50,000. It only applies if one person in a household partnership has an annual adjusted income in excess of £50,000. Thus, a single parent with income in excess of £50,000 is penalised, whereas if both parties were to receive £45,000 each, there would be no penalty.
The charge is the ‘appropriate percentage’ of the total child benefit received by either partner in the fiscal year. Where the adjusted net income is £60,000, the appropriate percentage is 100%: and the total benefit is clawed back.
The important thing to note is that it is not the child benefit, nor necessarily the recipient that is subject to the child benefit charge; it is the member of the family partnership with the highest income who is subject to the tax.
What is a partner?
Taxpayers are partners if:
- they are a man and a woman who are married to each other and are neither separated under a court order, nor separated in circumstances where the separation is likely to be permanent;
- a couple, who are not married to each other but are living together as man and wife;
- the persons are two men, or two women, who are civil partners of each other and are neither separated under a court order, nor separated in circumstances in which the separation is likely to be permanent;
- the persons are two men, or two women, who are not civil partners of each other but are living together as if they were civil partners.
Adjusted net income
Adjusted net income is defined in Section 58, Income Tax Act 2007. It is net income after deduction of gift aid (grossed up), pension scheme contributions and losses etc. It will therefore include dividends, income from property including holiday homes, interest on savings, pensions as well as self-employment and casual work. The self-employed should bear in mind when preparing their accounts that they need to make use of all available deductions, such as capital allowances, and maximise their pension contributions if necessary.
A week is a period of seven days beginning with a Monday; it is in a tax year if the Monday with which it begins is in the tax year. As the charge is by reference to weeks, it will apply only to those weeks of a fiscal year for which a partnership exists.
Example On 6 April 2013 Frances is a sole parent entitled to child benefit of £33.70 per week for her two children. Her annual adjusted net income is £55,000.
Percentage charge: £55,000 - £50,000 = 50%
Frances is liable to a charge of 50% x £1752 (after rounding down). The charge would be £876. Note that this is the actual tax charge, not the assessable amount.
If child benefit is being paid, and a couple start living together, the charge will arise from the time the couple live together.
If a partnership breaks up the higher earning partner will only be liable from 6 April until the date the partnership breaks up.
This could cause problems where people enter into serial partnerships, since HMRC are proposing to monitor the situation on a weekly basis!
There is an exemption if one partner had previously claimed child benefit on the basis that they were living with the child and after an absence of less than 52 weeks, resumed the claim on the same basis. This would occur when a parent moves away for work and leaves the child with a family member until they return.
One of the problems with this legislation is that both partners are required to disclose their income. This caused a lot of difficulties prior to the introduction of separate assessment in 1990/91 and many people would regard it as an intrusion into their privacy. The only way to avoid this would be to disclaim the child benefit.
If they cannot or will not ascertain their partner’s income, HMRC is willing to help. It will try to provide the minimum information to enable them to establish whether either has a ‘higher income’.
Election not to receive child benefit
If a partner’s income exceeds £60,000, it may be preferable to disclaim the benefit in order to avoid the charge. The election takes effect in relation to weeks beginning after the election is made. If the claimant decides to elect not to receive the benefit, because the expected income is over £60,000 and the higher income partner finds that this is not the case, the claimant can revoke the election.
The revocation can only be backdated up to two years, provided there would be no high income child benefit charge (because the income was less than £50,000). If a partner’s income falls between £50,000 and £60,000, they could be worse off if they had elected not to receive the child benefit:
- the person entitled to receive child benefit may elect not to receive the benefit for one or more of their children;
- the election only applies for weeks after it has been made;
- where entitlement to child benefit is backdated the election may be made in respect of any child benefit payments in the period ending three months before the claim was made;
- the revocation has effect for payments made for weeks beginning after the revocation was made;
- if a person has revoked the election on the grounds they believed it would be subject to claw back but one did not in fact arise, the election not to receive child benefit can be revoked within two years
- a child is defined as including somebody who is a qualifying young person for the purposes of the child benefit regulations.
Child benefit itself is not liable to tax and the amount that can be claimed is unaffected by the new charge. The charge is levied upon the member of the household with the highest income.
On 6 April 2013 Lisa is a sole parent entitled to child benefit of £47.40 for her three children. Her annual adjusted net income is £55,000.
On 6 January 2014, Lisa lives with Johnny as man and wife. Johnny’s adjusted net income is £200,000.
For the period 6 April to 5 January, the child benefit received by Lisa will be subject to a claw back charge by reason of her income. As there are 39 weeks in that period, the total child benefit would be £1848.60. As her income at £55,000 is between £50,000 and £60,000 there will be a charge to pay. This will be 50% x £1848, i.e. £924.
From 6 January, she is in partnership with Johnny and the benefit charge will be levied on him. This would be 100% x 13 x £47.4 = £616.20.
A person can claim child benefit even though the child is not living with them. This would occur when the person is paying for the child’s maintenance at least to the extent of the child benefit claimed.
- when an election has been made to disclaim child benefit;
- after the death of the child.
Those liable to the charge will have to declare the liability on their tax returns. Now is the time to make sure that they have all the information to hand, particularly if they have not previously submitted a tax return.
HMRC estimates that this legislation will bring another 500,000 individuals within the self-assessment regime. Now is the time to get the paperwork in order.
Paper tax returns must be submitted by 31 October 2013 and online returns by 31 January 2014.
For further information, see ACCA's Guide To... High Income Child Benefit Charge (which you can share with clients).