You may be liable to a new tax charge if you, or your partner, have an individual income of more than £50,000 and one of you is receiving Child Benefit. It may also apply if someone else receives Child Benefit for a child that lives with you.
Although the change applied from January 2013, the calculation to decide whether or not a household is affected by the change will include the full income for 2012/13. So those households that include higher earners need to be aware of the rules now.
Who is affected?
You will be affected by the High Income Child Benefit charge (HICBC) if during a tax year any of the following applies to you:
• you have an individual income of more than £50,000 and are entitled to receive Child Benefit
• you have an individual income of more than £50,000 and live (or have lived) with a partner who's entitled to receive Child Benefit
• both you and your partner have an income of more than £50,000 per year, you have the higher income and one of you is entitled to receive Child Benefit
• you have an individual income of more than £50,000 and both of the following apply:
o someone else is entitled to receive Child Benefit for a child who lives with you; and
o they're entitled because they contribute at least an equivalent amount towards the child's care
Who isn’t affected?
You won't be affected if both you and your partner each have an individual income below £50,000 for a tax year; or neither you nor your partner are entitled (or have been entitled) to receive Child Benefit.
The options if you’re affected
If you are affected, you have two options:
1. keep receiving Child Benefit payments - but if you do you will need to declare the amount you or your partner are entitled to by filling in a tax return each year and registering for Self Assessment if you haven't done so already
2. tell the Child Benefit Office that you want to stop receiving Child Benefit payments - in which case you won't be liable for the new tax charge and won't need to fill in a tax return (unless you need to for other reasons).
What to do if you’re going to continue receiving Child Benefit payments
You will need to declare the Child Benefit by filling in a Self Assessment tax return.
I've never filed a Self Assessment Tax Return before!
If you don't already fill in a tax return, you will need to register for Self Assessment. You need to register as soon as possible and no later than 5th October 2013. If you register late you may have to pay a penalty.
You already fill in a Self Assessment tax return
If you already fill in a Self Assessment tax return, then you will need to declare the Child Benefit you are entitled to receive when you complete your 2012-13 tax return.
2012-13 tax year
You need to declare the amount of Child Benefit you, or your partner, are entitled to receive for the period 7th January 2013 to 5th April 2013 only.
You need to include this in your tax return for the year ended 5th April 2013.
The deadline for completing this tax return is:
• 31st October 2013 if you send a paper tax return
• 31st January 2014 if you send it online
Late tax returns
Failure to file your tax return on time, will lead to HMRC issuing you with a fixed penalty of £100 and the longer the delay; the more the penalties can mount up. The tax return penalty regime was recently overhauled, and whereas before, a tax return that was twelve months late could be fined £200, under the new regime, a return with an equivalent delay would be issued with a minimum penalty of £1,600.
Read our article on the new penalty regime.
Calculating the charge
The amount of the tax charge will depend on the amount of Child Benefit entitlement and the level of your 'adjusted net income'.
The tax charge will be 1 per cent of the Child Benefit paid for every £100 of income between £50,000 and £60,000. If your individual income is £60,000 or more, the tax charge will be equal to the full amount of Child Benefit you, or your partner, are entitled to receive.
Individual’s adjusted net income is £54,000 and entitled to Child Benefit for two children.
The tax charge will be worked out as follows:
Step one: income over £50,000 = £4,000
Step two: Child Benefit for two children from 7th January 2013 to 5th April 2013 = £1,752.40 x 3/12 months = £438
Step three: determine the percentage rate to be applied to the result from step one, so £4,000 ÷ 100 = 40 (%)
Step four: £438 x 40% = £175
The tax charge for 2012/13 will be = £175
This example is intended to inform rather than advise and is based on the particulars in the scenario and on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of this example before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.
How to pay the tax charge
If you are liable for the High Income Child Benefit charge you can choose to pay it in a lump sum through Self Assessment or you can choose to pay it through your tax code from 6th April 2013.
But if you choose to pay the tax charge through your tax code, you will still need to complete a Self Assessment tax return.
Should I drop out?
If the higher earner’s income is over £60,000, it may be advisable to ask the person receiving the Child Benefit to opt not to continue to do so, since the Child Benefit will all be clawed back in full; albeit from someone else. This could avoid the person with the higher income engaging with the self assessment system unnecessarily.
Note however, that this claim to opt out can only be made by the person who is paid the Child Benefit.
If you decide to stop your Child Benefit payments it won't affect your entitlement to Child Benefit. As long as you, or your partner, are entitled to receive it you should still fill in a Child Benefit claim form if you have not already done so. This is because entitlement to Child Benefit can help you qualify for National Insurance credits that can protect your entitlement to state benefits such as the State Pension and Guardian’s Allowance and ensures your child will be automatically issued with a National Insurance number before their 16th birthday.