The recent Budget introduced changes to Child Benefit. The change applies from 7th January 2013. They will apply to about one in seven households currently receiving Child Benefit.
What is the change?
The Budget announced that Child Benefit would be progressively withdrawn from households where one partner earns more than £50,000 a year. This is based on the income of the higher earner.
How is the withdrawal of the benefit calculated?
The benefit is withdrawn at the rate of 1% for every £100 above this threshold.
So if you earn £55,000, you will lose 50% of the Child Benefit currently paid to your household.
This is calculated as follows:
£5,000 (amount earned above £50,000) divided by £100 = 50%
If in a household one partner earns more than £60,000 then all Child Benefit is repayable.
How is the benefit repaid?
The benefit is repaid through the tax system. It is called a ‘high income benefit charge’. This is an extra tax on the higher earner.
How much extra tax will be payable?
The extra tax will be the amount of Child Benefit that has been overpaid.
So if for example your household currently receives child benefit of £20.30 per week and you earn more than £60,000 a year you will have an extra £1,055 a year to pay in tax.
If you have two children the extra tax will be £1,752 a year and for three £2,449.
How will the extra tax be paid?
The extra tax payable will be due via the self-assessment system if you complete a tax return or PAYE if you do not.
Risk of a penalty for non compliance
It is the duty of a taxpayer to tell the tax office if the rules apply to them. They face additional penalties and interest as well as the tax for failing to do this.
Can you avoid receiving cash in one hand and paying it back in the other?
Yes, the person receiving the money can elect to stop payment of Child Benefit. This means that no Child Benefit is paid but no tax is due. This election can be changed at any time.
A formal election needs to completed just not collecting the Child Benefit is not sufficient to avoid paying the extra tax.
Who pays the higher income benefit charge?
The higher income benefit charge is paid by the higher earning partner in the tax year.
The income is calculated on the total income including benefits in kind and investment income less deductions for pension contributions and gift aid payments.
I am not married to my partner. Do the new rules still apply to me?
Yes, the rules still apply in these circumstances.
The children of the household are from my partner’s previous relationship do the changes apply to me?
Yes, the changes still apply to you.
Are the rules fair?
No they are probably not. For example, you may earn £90,000 a year and your partner has no income at all.
In these circumstances you would lose your Child Benefit.
Whereas your neighbours may both work earning £45,000 a year each, and they would still receive the full Child Benefit with no restrictions.
Is there any good news with this?
The only good point is that it only applies part way through this tax year. This means that a household with two children will only owe one quarter of the annual amount for 2012/13.
Are there tax planning opportunities that can reduce the tax payable on child benefit?
Obviously if you are employed then you cannot have your salary paid to your partner but you could consider making additional pension contributions to reduce your taxable income.
If you have income from investments, you could transfer assets into joint names so that you share income equally between you.
If you are self-employed, you could consider entering into a partnership so that business profits are shared between you.
If you trade through a limited company, you could make your partner a shareholder and possibly share dividend income.
These decisions do have legal and other tax consequences and anyone contemplating changes should always take professional advice.
Kirkpatrick and Hopes already prepare my tax returns. Will you need more information from me to help prepare my 2012/13 tax return?
We will need details of the Child Benefit paid to your household from 7th January 2013 onwards together with details of your partner’s income to make sure we correctly complete your tax return.
Are you offering a Personal Child Benefit Review so you can tell how the rules affect me?
Yes, we are offering an optional meeting to discuss how the changes apply to you and the likely extra tax payable by the household together with possible planning solutions for a fixed fee of £500 plus VAT.
This is reduced to £200 plus VAT for existing K&H clients and this can be added to your existing fixed fee agreement with us.
It is important that we meet with both partners to make sure we have the full facts.
Should I do anything else?
The present proposals do seem very difficult and costly to administer. It is still five months before the change. Consider lobbying your MP and ask the government to review the proposals. This is more important than the pasty tax!
I think that many people are not fully aware of these changes so please pass on this blog entry to anyone with children.