High Income Child Benefit Charge

Effectively, Monday 07 January 2013 saw Child Benefit added to the list of other means-tested benefits by the introduction of the High Income Child Benefit Charge (the ‘Charge’).

The Finance Act 2012 inserted the above Charge into Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003.  This imposed the new Charge on a taxpayer in the following circumstances:

• Where the taxpayer has an individual adjusted net income above £50,000 in a tax year and is entitled to receive Child Benefit
• Where the taxpayer has an individual adjusted net income over £50,000 and lives, or have lived, with a partner who receives Child Benefit
• Where, together with a partner, adjusted net incomes are in excess of £50,000 in the tax year and one is entitled to receive Child Benefit.

For those where the income is between £50,000 and £60,000, the Charge is calculated as 1% of the Child Benefit entitlement for every £100 that the £50,000 threshold is exceeded, rounded down.

For example:

The Charge is applied by adjusting the taxpayer’s tax code or via the Self-Assessment Tax Return.  Either way, the employee will pay increased tax at their marginal rate.  Regardless of which method is chosen, if the taxpayer, or partner, continues to receive Child Benefit, they must register to complete a Self-Assessment Tax Return.

There is no High Income Child Benefit Charge where:

• The taxpayer and their partner have individual incomes below £50,000 in a tax year, or
• The taxpayer or their partner are not entitled to Child Benefit

Where the income threshold exceeds £60,000, the Charge is equivalent to the value of the Child Benefit itself.  If the claimant continues receiving Child Benefit, the Charge will ensure that the net Benefit is zero, as it will be applied either through the tax code itself or via Self-Assessment.  If a taxpayer in this over £60,000 category chooses to give up their Child benefit entitlement, there will be no Charge.

For the tax year 2012/13, the first year of the Charge, the full adjusted income for the complete tax year will be taken into account but less only the Child Benefit that is payable between 07 January and 05 April 2013.  This will result in a pro-rata Charge.  For 2013/14 and onwards, the FULL amount of the Child Benefit will be taken into consideration when calculating the Charge.

If a taxpayer chooses to continue receiving Child Benefit and is in the affected thresholds (i.e. above £50,000), they need to register for Self-Assessment by 05 October 2013.  If completed electronically, the deadline for 2012/13 Tax Returns is 31 January 2014 (31 October 2013 if on paper).  Any underpayment of tax for 2012/13 can be collected via their tax code in 2014/15 if they choose.

Comments

Payroll professionals are advised to make themselves familiar with the High Income Child Benefit Charge in the event that this is queried by employees or clients.  However, it goes without saying that personal tax issues are just that – they are the individual’s responsibility.

With regard to the changes, it is worth considering the long-term future of this Charge, given the fact that Child Benefit appears to have been adopted as a means-tested welfare payment in all but name.  There are seven means-tested benefits that currently exist:

1. Child Tax Credit
2. Housing Benefit
3. Income-Related Employment and Support Allowance (ESA)
4. Income-Based Jobseeker’s Allowance
5. Income Support
6. Working Tax Credit
7. Council Tax Benefit

Council Tax Benefit is being abolished from April 2013 and replaced by Local Council Tax Support, operated by each Local Authority.  The Universal Credit (UC) will see the other six of the above legacy benefits integrated into one payment, commencing from October 2013.  The effective creation of another mean-tested benefit, i.e. Child Benefit, seems to confuse the welfare landscape, as there will be two independent child support systems – one via the UC and the other via the High Income Child Benefit Charge.

Does this mean that Child Benefit will be absorbed into the UC by 2017, as Iain Duncan Smith has already indicated back in 2010?  This seems to make sense to me.  If it is absorbed, surely this means an end to the administration involved at HMRC in policing this new Charge.

Further Information

• HMRC Communications – High Income Child Benefit Charge – Issue Briefing
• HMRC – High Income Benefit Charge – The Basics
• Payroll Help 21 March 2012 – Tax Charge on Child Benefit