15 October 2012

From 7 January 2013 the High Income Child Benefit Charge takes effect. Couples where at least one partner has high income may suffer extra income tax in relation to Child Benefit received by the family.

Background

Child Benefit is received tax-free. But a new income tax charge, the High Income Child Benefit Charge (“HICBC”), takes effect from 7 January 2013. The HICBC will mean that Child Benefit is effectively means-tested by reference to income, as a tax charge can result from its receipt. Estimates indicate that the HICBC may affect 1.2 million households; 70% of these households will effectively pay back all of their Child Benefit in extra tax charges, and 30% will pay back a proportion.

The HICBC will apply where a person claiming Child Benefit, or their partner, has ‘adjusted net income’ in excess of £50,000 per annum. The person with the higher adjusted net income faces an extra tax charge in relation to the Child Benefit actually received either by them or by their partner. The HICBC increases in line with adjusted net income, and if the latter is £60,000 or more per annum the tax charge paid will effectively remove all the Child Benefit received by the family.

Definitions

In describing the HICBC, we have referred to the terms ‘adjusted net income’ and ‘partner’.

Adjusted net income for the purpose of the HICBC includes income from earnings, self employment, dividends, interest, rental income and pensions, less certain allowable deductions such as trading losses, allowable loan interest, pension contributions and charitable donations.

A person is a partner of another person if the persons are:

  • Married, or are civil partners, and are neither separated under a court order nor separated in circumstances such that the separation is likely to be permanent; or
  • Living together as if they are married or civil partners.

Summary of the HICBC

Some key points of the HICBC are as follows.

  • The HICBC will be at a rate of 1% of Child Benefit for each £100 of adjusted net income between £50,000 and £60,000 per annum. The HICBC on a person with adjusted net income of £60,000 or more per annum will result in a tax charge equal to the Child Benefit received by them or their partner.
  • The HICBC will apply to the partner in a household with the highest adjusted net income. This person may not be the recipient of the Child Benefit.
  • The HICBC applies where either the person claiming Child Benefit, or their partner, has adjusted net income of over £50,000. Therefore it will be necessary for one person to know their partner’s adjusted net income in order to assess liability to the HICBC.
  • A person can elect not to receive Child Benefit and thus avoid paying the HICBC.
  • The HICBC is calculated by reference to weeks, so if a divorce or separation occurs during a year, or a relationship forms during a year, liability to the HICBC will change during that year.
  • Under the Child Benefit rules, a person can claim the benefit for a child who does not live with them, if they are contributing to that child’s upkeep. Complex rules exist to determine on whom the HICBC would be charged in such circumstances.

Compliance requirements

Taxpayers affected by the HICBC will need to declare their liability to the HICBC via a self assessment tax return. HM Revenue & Customs (“HMRC”) estimates that up to 500,000 taxpayers who do not currently file a self assessment tax return could be required to do so as a result of the HICBC. The first HICBC will apply for the 2012/13 tax year. The deadlines for filing self assessment tax returns for 2012/13 will be 31 October 2013 if filed by paper, or 31 January 2014 if filed online. The due date for payment of the 2012/13 HICBC and any other tax liability will be 31 January 2014.

Action and planning points

HMRC will shortly be writing to all households they believe may be affected by the HICBC. How HMRC will be sure they have contacted everyone that might be affected and how they will deal in the future with people falling in and out of the plus £50,000 adjusted net income bracket remains to be seen.

Some thoughts and considerations for affected taxpayers are as follows.

  • It is generally advisable that Child Benefit is claimed in the usual way when a child is born, even if the parents intend electing not to receive Child Benefit later. This is because the parent then still retains associated National Insurance credits towards state pension entitlement. Doing this will also mean the child automatically gets issued with a National Insurance number when they reach 15.
  • The HICBC applies where one partner has adjusted net income in excess of £50,000. If both partners have adjusted net income of say £45,000 there is no HICBC and Child Benefit remains intact. Income splitting between couples, where possible, is therefore important. This of course puts unmarried couples at a disadvantage to married couples.
  • Adjusted net income is income before tax but after certain deductions. Taxpayers who will be affected by the HICBC may wish to consider whether any planning can be undertaken to reduce this to effectively preserve the Child Benefit for their family.
  • Taxpayers who believe they will have high adjusted net income may consider whether they wish to make an election not to receive Child Benefit.

Conclusion

There has been widespread criticism of this government policy because of the significant complexity, inequity, administration and complications that will result. The legislation cuts across the principle of independent taxation; compliance requires one partner to know the other partner’s tax position each year. An outcome of the new rules is that where for example a wife receives the Child Benefit and the husband has net income in excess of £60,000, the husband will have a tax liability (by virtue of the HICBC) on money that his wife has received.

Despite significant criticism, the policy has been followed through and the HICBC will commence with effect from 7 January 2013. Penalties for non compliance should be avoided and taxpayers are encouraged to seek advice to ensure their tax obligations are met.

Contact Us

For more information and advice on the HICBC and self assessment filing obligations, please contact us on 01788 539000.

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This document has been prepared as a general summary. It has been written for information purposes, should not be relied upon and is not a substitute for professional advice which should be sought. This document does not constitute taxation, financial planning or investment advice. Neither Magma Chartered Accountants or any of its employees accept any responsibility for loss or damage incurred as a result of acting or refraining from acting upon anything contained in or omitted from this document. Magma Chartered Accountants is the trading name of Magma Audit LLP, a limited liability partnership (Registered in England No. OC370086). Magma Audit LLP is a subsidiary of Magma Partners LLP (Registered in England No. OC370051). The registered office of both LLPs is: Bloxam Court, Corporation Street, Rugby, CV21 2DU. Registered to carry on audit work and regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales. Magma Partners LLP is registered with the Chartered Institute of Taxation as a firm of Chartered Tax Advisers. A list of members is available on request.