The Child Benefit Tax Charge

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Introduction –the UK High-Income Child Benefit Tax Charge

The UK High Income Child Benefit Tax Charge was recently introduced. This applies to individuals who earn over £50,000 a year. Under this system, an individual will start to pay back Child Benefit over £50K by way of a tax charge. Therefore, you will start to repay Child Benefit if you earn over 50k via your Self-Assessment tax return or through your tax code.

Originally, the UK Child Benefit was payable to all, regardless of how much one earned. However, since early January 2013, the rules have changed. Now, if one partner’s income is over £50,000, they are not entitled to receive the full amount of benefit. 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).

Initial thoughts

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 will receive National Insurance (NI) credits when you claim Child Benefit.  Therefore, you do not need to do anything in respect of your NI credits.

There is no limit to how many children you can receive Child Benefit payments for.

Furthermore, only one person in the relationship can receive the benefit for a child.

Two other articles on this website which explain how your personal tax position can be affected in the UK are student loan repayments and the UK marriage allowance transfer.

What’s more you might save tax through your self-assessment if you invest into an Enterprise Investment Scheme during the tax year.

How Child Benefit works   

The amount that is payable when you are claiming Child Benefit 

There are two rates that are available, when you are receiving Child Benefit:

Who the allowance is for             Rate (weekly) for the 2022/23 tax year

Eldest or only child                       £21.80

Extra children                                £14.45 per Child

UK Child Benefit in 2022/23 is effectively worth nearly £1,885, for a family with two children.

The recent history 

It was a rather surprising announcement in the 2012 Budget, that UK Child Benefit would no longer be payable to all. UK Budgets are held every year in the Spring, the last one of which was the March 2022 Spring Statement.

The change that came in following the 2012 Budget, taxes the higher earner of a couple if one of them earns over £50,000.

The Child Benefit Tax Charge -the process

The partner with the highest income will handle repaying part or all the benefits received.

What’s more, if both parents earn over £50,000, it is the highest earner that should account for this and report it on their tax return.

The Higher Income Child Benefit Charge is chargeable on a sliding scale, between the income of £50,000 and £60,000.

Key to note, the higher earner will pay the charge at a rate of 1%, for every £100 that they earn over £50,000.

If the higher-earning parent earns over £60,000 a year, the entire Benefit is, in effect, removed. As a consequence, it is payable back as part of their tax bill.

If you earn over £50,000, you will be paying the tax charge as part of your Income Tax bill that is payable to HMRC each year.

Please note if both parents earn under £50,000, the rules will not affect them. Therefore, if both earn £45,000 (a total of £90,000), they can still claim the full Child Benefit. Yet, for a family with only one earner earning over £60,000, they would lose all their Child Benefit.

The choices that are available if the Child Benefit Tax Charge applies to you

If you are a contractor or small business owner and you are the higher earner, you will need to declare the UK Child Benefit that is received on your personal tax return. As a result of this, HMRC will adjust your tax bill accordingly.

Furthermore, if your partner is the higher earner, they can do the same. However, if they are not yet registered for Self-Assessment (SA), they will need to register. Once registered for SA, they need to report and repay the amount of Child Benefit that they owe as a result of their income.

If these rules affect you, the two options that are available are:

  • Apply to de-register for UK Child Benefit. You can contact the Child Benefit Office by completing an online form, or by calling them. If you call, you will need to give them your National Insurance number when you ring them.

The tax charge on Child Benefit -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 will reduce your overall taxable income. As a result, your income is no higher than it needs to be. As a result, it may also bring your income beneath the level where the High-Income Child Benefit Tax Charge comes in.

Opportunity 

As a final note, there are also tax saving opportunities here. You could pay your partner a salary from your company or transfer some shares to them. As part of this, it will lower your own 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: August 1st, 2022 / Categories: Self-Assessment /

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