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Child Benefit Changes – What It Means For You

Posted on: February 11th, 2013 by Hardeep No Comments

If you keep up-to-date with the news, you’ll surely be aware of the recent changes made to the rules on Child Benefit. But in case you’re not, here’s a quick summary:

 

What Are The Changes?

The changes to Child Benefit mean that high-earners will have to pay extra tax on payments received. The extra tax could cancel out a portion of the Benefit received, or the whole amount entirely.

The changes, which came into force on 7 January 2013, will affect families where one parent is earning more than £50,000 a year.

For those families where at least one parent does earn over £50,000, their child benefit will be cut (with larger cuts as that income increases). The total tax charge for those with an income of between £50,000 and £60,000 is 1% of the amount of Child Benefit received for every £100 of their income over £50,000.

If the income reaches £60,000 or more though, the tax charge will be 100% of the amount claimed; i.e. cut completely.

It is important to note though that the changes will not affect families who have a combined income over £50,000; such as those where both parents earn £38,000.

 

So Does This Mean Some Families Will No Longer Receive Any Child Benefit?

Not exactly, as families were given the choice whether to receive child benefit or not.

HM Revenue and Customs (HMRC)  gave Child Benefit recipients up until the 6th January 2013 to decide whether to stop receiving it or not.

Those who earn between £50,000 and £60,000 are likely to have decided to continue receiving the payment, despite the tax charge they will incur. This is because the charge will always be less than the amount of Child Benefit and so they could lose out on money they’re entitled to if they had chosen to opt out.

Those who earn £60,000 or more though may have decided it is not worth claiming as they will have to pay the full amount back again through the High Income Child Benefit charge.

However, some taxpayers may have chosen to still claim the Child Benefit, knowing it will need to be paid back. There are a number of reasons they may have opted to do this, including the interest that may be earned by putting the benefit in a high interest savings account.

 

So What Did You Decide to Do?

Whatever you decided to do, you should know that you can change your mind at any time and opt back in/out whenever you want.

However, as the deadline for opting out has now expired; pulling out now means you will be liable to the tax charge on any Benefit from 7 January 2013 up until the date the payments stop.

As with stopping the Child Benefit payments, only the person who is entitled to Child Benefit can choose to restart them. This can be done online or by contacting the Child Benefit Office.

 

I’ve Decided to Keep Claiming Child Benefit – Is There Any Way to Avoid or Reduce the Tax Charge?

The only way to reduce the additional Tax charge associated with receiving Child Benefit is to reduce your taxable income.

This can be done in a number of ways such as:

-by making additional payments into your pension

Increasing your pension contributions could reduce your taxable income to below the £50,000 limit, therefore meaning you could still be eligible for the full child benefit payments.

-using salary sacrifice, e.g. putting part of your pre-tax salary into childcare vouchers

By opting to have some of your salary in the form of childcare vouchers, your taxable income will be reduced.

-by making charity donations

By using gift aid to donate to charity, your income may be adjusted enough to bring you below the Child Benefit tax charge threshold.

-Directors of Limited Companies could Split Shares

Some contractors choose to introduce their spouse into their limited company as a shareholder.

By splitting the shareholding of your limited company, you can then split the dividend payments too.

This can be done to gain tax advantages as it may bring your income down to below the high earners threshold.

However, it is important to note that there are rules surrounding this and you should talk such an option through with a tax expert.

To discuss this, please feel free to contact us on 0203 5827 122.

 

How Do I Pay the Tax Charge?

If you’re self-employed (and so already complete a self-assessment form), you’ll need to include the information associated with child benefit in your returns for 2012/13 and going forwards. You will then be charged for this as part of your overall tax bill.

For those in the PAYE system (who have their tax deducted by an employer), you will still have to complete a self-assessment form for the period in which child benefit has been claimed. This means you will need to register for Self Assessment as soon as possible. The deadline to do so is 5 October 2013, after which you may have to pay a penalty.

For further information on registering for Self-Assessment, visit http://www.hmrc.gov.uk/sa/register.htm or call us to for professional advice.

 

Finally…Let’s Look at Some Examples

Earners in Household

Amount

Child Benefit After Tax Charge (Annual Amount Based on Family with 2 Children)

Explanation

1

£47,000

£1,752

(£20.30 for the eldest child weekly + £13.40 for the second child weekly)

As there is 1 earner with less than £50,000 income, there is no tax charge on the child benefit received.

1

£55,000

£876

The family can keep some of the benefit, however, must pay back 1% of every £100 earned above the £50,000 threshold.

In this example, the charge is 50% of the total benefit, totalling £876

2

Earner 1 £48,000

Earner 2 £37,000

£1,752

Although the couple’s combined income is over £50,000 they are entitled to keep all of their Child Benefit as neither individually earns over the £50,000 threshold

2

Earner 1: £61,000

Earner 2: £64,000

£0

Earner 2 would be charged the additional Tax as it’s applied to whoever earns the most. As the highest earner has an income of over £60,000 the tax charge will be equivalent to their entire child benefit entitlement.

 

Further Information

For further information on Child Benefit, visit http://www.hmrc.gov.uk/childbenefit/index.htm or to get an estimate of how much tax the person with the highest income in your family may have to pay, visit https://www.gov.uk/child-benefit-tax-calculator.

Alternatively, contact us to discuss any queries you may have on 07508 261724 or email Info@1ca.co.uk

 

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