The UK Child Benefit tax charge

Introduction 

Originally, the UK Child Benefit was payable to all regardless of how much one earned. But, since early January 2013, the rules changed. Now, if one parent earns more than £50,000, they are not entitled to receive the full amount of Child Benefit.

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.

There is no limit to how many children you can claim UK Child Benefit. 

Furthermore, only one person can get Child Benefit for a child.

Two separate articles of mine 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 have invested into an Enterprise Investment Scheme during the tax year.

How it works   

The rates that are payable 

There are two UK Child Benefit rates:

Who the allowance is for             Rate (weekly) for the tax year 2021/22

Eldest or only child                         £21.05

Extra children                         £13.95 per Child

UK Child Benefit in 2021/22 is effectively worth nearly £1,819 for a family with two children.

History 

It was a rather surprise announcement in the 2012 Budget such 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 2020 Budget.

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 process 

The partner with the highest income handles 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.

The tax is chargeable on a sliding scale between the income of £50,000 and £60,000.

Key to note, the tax rate is 1% of the UK Child Benefit that you receive for every £100 that you earn over £50,000.

If the higher-earning parent earns over £60,000, the entire Benefit is, in effect, removed.

Please note if both parents earn under £50,000, the rules will not affect them, e.g., 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 this affects you 

If these rules affect you, two options are available:

What’s more, if you are a contractor and you are the higher earner, you can declare the UK Child Benefit 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 and they are a contractor, they can do the same. But if they are not a contractor and they are an employee instead, they would need to register for Self Assessment to repay this.

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, etc. So, please make sure that you include these. As a result, your gross taxable income is then no higher than it needs to be and this may bring your income beneath the level where the UK 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 or transfer some shares to them to lower your gross taxable income. You should discuss these areas with your contractor accountant.

Link to Contractor Advice UK group on 

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

Published On: March 3rd, 2021 / Categories: Self-Assessment / Tags: /

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