The Child Benefit Tax Charge

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 Introduction 

As a UK contractor limited company owner, are you aware of the UK Child Benefit High Income Tax Charge? The government recently introduced the High Income Child Benefit Tax Charge, which applies to individuals who earn above the Child Benefit earnings limit. The Child Benefit income limit is currently set at £50,000 (£60,000 in 2024/25). Therefore, it affects those earning over £50,000 a year in 2023/24. This includes UK contractors and other professionals, and one starts paying back Child Benefit over £50K in the tax year just gone. If you’re employed and the Child Benefit tax applies, you’ll repay the benefit through your tax code applied to your salary. If you have a UK contractor company and take mainly dividends as income, you’ll pay back Child Benefit if you earn over £50k via a Child Benefit tax return charge under Self Assessment.

The UK Child Benefit (CB) was initially payable to all, regardless of how much one earned. However, since early January 2013, there was a change to the rules. Now, if one partner’s income exceeds £50,000 (£60,000 in 2024/25), they’re not entitled to the total benefit amount. When we say income, this means adjusted net income. This, in turn, means gross income less any tax reliefs. These reliefs will include donations under Gift Aid, personal pension contributions, or relief for investments under Venture Capital Trust schemes (EIS, SEIS, and SITR). Therefore, you should consider the high-earner child benefit tax charge, and the fact that you start to pay back child benefit when you earn over the threshold.

Initial thoughts on UK Child Benefit (tax return) 

Those who receive Child Benefit income

As a contracting professional, are you responsible for one or more children under the age of 16 (or under the age of 20 if they stay in approved education or training)? If the answer is yes, you can claim for UK Child Benefit. In addition, you’ll receive National Insurance credits when you claim CB. Therefore, you don’t have to do anything regarding your NI credits.

There is no limit to the number of children you can receive Child Benefit (UK) payments for. Furthermore, only one person in the relationship can receive the benefit for a child.

What are HMRC’s contact details?

Here are two valuable links from HMRC regarding UK Child Benefit.

  • Child Benefit transfers. If you want to transfer CB from one parent to another, please read the HMRC process.

Other contractor guides

Two other guides on this contractor website explain how your personal tax position can be affected in the UK. These are student loan repayments and the UK marriage allowance transfer. You might also save tax through SA if you invest in an Enterprise Investment Scheme during the tax year. 

How does UK Child Benefit work? 

The amount that’s payable when you claim Child Benefit 

There are two rates available when you receive Child Benefit in 2023/24 and 2024/25:

Who is the allowance for Rate (weekly) for the 2023/24 tax year Rate (weekly) for the 2024/25 tax year
Eldest or only child £24.00 £25.60
Extra children £15.90 per child £16.95 per child

UK Child Benefit in 2024/25 is worth nearly £2,212 (£2,075 in 2023/24) for a family with two children.

Currently, Child Benefit payments can take up to 16 weeks to begin. However, HMRC has now launched an online claim service for new parents. This is a much quicker process, and they say it can take as little as three days for payments to commence. The new digital application form follows a successful pilot scheme. Moreover, most new claimants can use the service if they’ve (or apply for) a Government Gateway ID. You can apply for Child Benefit using this HMRC link. In addition, they have a helpful video in this YouTube link. Which shows how to make a claim. Therefore, if you want to make a claim, the details and documents you must provide are:

  • Your child’s birth or adoption certificate.
  • Bank or building society details.
  • Your National Insurance number.
  • Your partner’s National Insurance number (if you have one).

It is important to note that any claim for children whose birth was registered outside the UK must send original documents by post. Furthermore, you can apply as soon as the birth is registered, and your claim can be backdated by up to 12 weeks. 

Recent history 

It was a surprising announcement in the 2012 Budget that UK Child Benefit would no longer be payable to all. UK Budgets are held annually in the Spring, the last of which was the March 2024 Budget.

The change following the 2012 Budget taxes was the introduction of the Child Benefit Tax Charge. This HMRC charge means that the higher earner of a couple if one has an adjusted net income of over £50,000 (now £60,000), repays part or all of the benefit. If one (or both) partners earn a high taxable income, the highest earner will start to pay back Child Benefit over £50K. Furthermore, the higher earner each year is the one who pays the tax charge.

The high-earner Child Benefit Tax Charge process 

When do you lose Child Benefit?

The CB income limit (UK) is now £60,000, so you’ll start paying back Child Benefit once you earn over £60,000. This £60K is the person’s overall taxable income after any tax reliefs. Therefore, if your salary is £61K and you have tax reliefs of £2K, your taxable income is £59K. As a result, you’ll not have to pay back the Child Benefit income. Therefore, it’s vital to remember that you pay back Child Benefit over £60K, but this is if your overall net taxable income is over £60K.

Who pays back their CB under the Child Benefit Tax Charge?

Now we know you pay back child benefit if you earn over £50k; please note the partner with the highest income will handle repaying part or all the Child Benefit income they receive. Moreover, if both parents earn over £60,000, the highest earner should account for this and report it on their tax return.

How do you pay the HMRC Child Benefit Tax Charge?

If you’re the highest earner and in employment and pay your tax via the PAYE system, the CB charge is included in your tax code. HMRC may also estimate the following year’s Child Benefit High Income charge. Therefore, the amount in your tax code may not always be correct. As a result, there’ll be some balancing up at the end of the tax year.

When the highest earner completes a UK tax return, they’ll include the Child Benefit amounts received. As a result, the CB tax on that will be part of the overall tax bill payable to HMRC.

How much is the child benefit tax charge?

As we mentioned, if you’re the highest earner in a couple, you’ll repay some Child Benefit if you earn over £60k of taxable income. The Higher Income Child Benefit Charge in 2024/25 is chargeable on a sliding scale, between income of £60,000 and £80,000 (£50,000 and £60,000 in 2023/24). As mentioned, the higher earner will pay a tax charge on Child Benefit. However, how much is the tax charge on Child Benefit? When we look this up, the tax on Child Benefit in 2023/24 was calculated at a rate of 1%, and for every £100 of income, they earn over £50,000. In 2024/25, there is a change, and the rate is halved to 1% of £200 on income over £60,000. What’s more, the official name for this tax is the Child Benefit Higher Income Tax Charge.

If the higher-earning parent earns over £60,000 a year, the entire Benefit is, in effect, removed. Therefore, you’ll pay back all Child Benefit over £60K; consequently, it’s paid back as part of your tax bill. As a result, you’ll be paying back Child Benefit over £60K, and you’ll be paying the CB tax charge as part of your Income Tax bill that’s payable to HMRC each year.

Please note that if both parents earn under £60,000, the rules won’t affect them. Therefore, if both earn £55,000 (a total of £110,000), they can still claim the full CB. Yet, a family with only one earner earning over £60,000 would lose all their Child Benefit.

Therefore, in 2024/25, CB receivers will not be withdrawn in full until individuals have a net adjusted income of £80,000 or more. In addition, the government plans to administer the charge on a household rather than individual basis by April 2026.

Child Benefit (tax return) & your choices when the charge applies 

Apply to de-register for Child Benefit

You can contact the Child Benefit Office by completing an online form or calling them. If you call them, you must give them your National Insurance number. You can view the HMRC community forums on the CB tax charge to see visitor questions and HMRC answers.

Declaring Child Benefit on tax return 

When you’re not de-registering, do you declare child benefit on your tax return (UK)? The answer to this is yes, and if you’re a limited company contractor or small business owner and the higher earner, you must declare the UK Child Benefit you received on your tax return. There’s a section on your tax return where you can complete this. As a result, HMRC will adjust your tax bill accordingly. However, it’s a Self Assessment tax return error if you overlook to include this. Therefore, if you’re the higher earner and receive Child Benefit, please ensure you include this on your tax return.

Furthermore, if your partner is the higher earner, they can do the same. However, they must register for Self Assessment (SA) if they’re not already registered. Once they register for SA, they can report and repay the amount of Child Benefit they owe because of their income.

If these rules affect you, you can apply to deregister for Child Benefit or pay the charge.

How to pay & declare Child Benefit Tax Charge to HMRC? 

The tax charge on your tax return

When you calculate your gross taxable income, you can make deductions for several things. These include personal pension contributions. They also include charitable donations under Gift Aid and payments to Venture Capital Trust schemes (EIS, SEIS, SITR). Therefore, please include these, as they’ll reduce your overall taxable income. As a result, your income is no higher than it needs to be. Moreover, claiming any tax reliefs may bring your total income beneath the level where the UK Child Benefit High Income Tax Charge comes in.

Once you’ve done the above, if your net adjusted income is more than £60K, you’ll pay back the relevant part of the Child Benefit. As a result, the Child Benefit Self Assessment charge is part of your overall tax bill. It is payable to HMRC by 31 January following the end of each tax year. 

Paying Child Benefit tax charge to HMRC

You can pay the Child Benefit charge via your Self Assessment tax return. Alternatively, you can arrange to pay back the child benefit through your tax code. Indeed, you might do this if your only main income is salary. If you prefer this option, you must complete a tax return for Child Benefit reporting, and if you’re not yet registered, you should organise this.

Final thoughts

As a final note on the UK contractor Child Benefit Tax Charge, there are tax-saving opportunities here. Limited company contractors can consider paying their partner a salary from their company or transferring some shares to them. As a result, the contractor will lower their potential gross taxable income. This is an area that you should discuss with your contractor accountant.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: April 6th, 2024 / Categories: Self-Assessment /

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