As of January 2013 the Government changed the rules regarding high earners and the possible charge arising on the Child Benefit that they receive. Child Benefit has always been paid out to individuals of all levels of income however, post the start of 2013 high earners now have to pay an extra tax charge on Child Benefits received throughout the year.
A higher earner in this instance is an individual with an income of over £50,000 a year. There is a 1% tax charge on the Child Benefit payments received for every £100 of income over the £50,000 limit.
E.g. Dave’s income is £58,000 in a particular year – his tax charge will equal 80% of the Child Benefit received in that same year.
For those earning over £60,000 the tax charge will increase to the point whereby it will cancel out all of the Child Benefit received throughout the year.
The Finer Details
When deciding whether this tax rule applies to yourself remember that it is the income of each individual within a household that is taken into consideration.
- You not only need to look at your own income but also the income of your partner
- If you have an income of over £50,000 then the extra charge will need to be paid
- If your Partner also has an income of over £50,000 then it will be the individual earning the most that will be responsible for paying this extra tax
- If both you and Partner have incomes less than £50,000 (even if they add up to over £50,000 in total), you will receive the full Child Benefit amount and not have to pay extra tax back
- Even if the child is not your own but he/she lives with you, the tax charge is still due on the higher earner
The benefits received are tax-free payments (unless the above applies to yourself and/or partner). The current set amount one parent can receive is £20.50 per week for the 1st child, and a further £13.55 for each additional child. These payments are administered by the HMRC and were brought about to help parents with the cost of raising children. Child Benefit payments apply to all children under the age of 16 and will stop if your child leaves full time education.
How do you pay the extra tax?
Anybody who receives Child Benefit payments and falls into the scope of the new high income child benefit charge will need to complete a self-assessment at the end of each tax year. This is when you will have to declare that you are eligible to pay the extra charge.
Even if you do not normally complete a self-assessment, the child benefit charge alone may bring you into the scope to complete one.
This tax charge is payable on 31st January after the end of the tax year, along with any other tax you would normally be paying through your assessment.
You can check the amount of Child Benefit you have received throughout the tax year here: https://www.gov.uk/child-benefit-tax-calculator
Reducing your Taxable Income
There are ways however to reduce your taxable income and therefore avoid the extra tax charge incurred by high earners for Child Benefit.
One way to do so could be by making larger contributions towards your pension. Pension contributions are taken away from your income before the tax charge you are due to pay is calculated therefore, if your income falls below £50,000 you will no longer need to pay the extra charge.
When would it still be beneficial to carry on receiving child benefit?
In some cases you may want to carry on receiving the child benefit even if you or your partner’s income is over £60,000
For example, if Mrs X has no income, but claims the child benefit, and Mr X had income of £60,000, we know the full amount will be repaid by Mr X to HMRC via his Tax Return. However, purely on the fact Mrs X is receiving the child benefit herself; she will receive a year’s credit towards her state pension. This applies for every year that child benefit is claimed up until your child’s 12th birthday (remember you need 30 years NI credits for a full basic state pension later in life).
Therefore, new mums and dads who are in the position detailed above are encouraged to register for child benefit to protect their entitlement to the state pension.
If you would like to receive further information on this topic please contact our Personal Tax Team on 01707 871610 for further advice on how to reduce your taxable income.