After several queries from confused parents, we explain what the child benefit overhaul may mean for you.
From 7 January 2013 the planned ‘cut’ in child benefit takes effect.
The Finance Act 2012 introduced an income tax charge on a taxpayer who is entitled to child benefit (or whose ‘partner’ is) and whose income exceeds £50,000 in a tax year. In the event that both partners have an income that exceeds £50,000, the charge will apply to the partner with the highest income.
A ‘partnership’ comprises:
• a married couple living together;
• civil partners living together;
• a man and a woman who are not married to each other but who are living together; or
• a man living with a man or a woman living with a woman who are living together as if they were civil partners.
The charge is equal to 1% of the amount of child benefit of every £100 of income above £50,000 and will be on the full amount of child benefit where income exceeds £60,000.
To be clear: There will be no change to your child benefit if neither you nor your partner has income above £50,000. But if either earns £60,000 + you get nothing.
As background, the current weekly amounts of child benefit are:
· £20.30 (£1,056 a year) for the oldest or only child.
· £13.40 (£697) for each additional child.
A taxpayer has income of £58,000 and receives child benefit for two children of £1,752 for a complete tax year. The percentage charge is calculated as follows: £58,000 - £50,000 = £8,000 /100 = 80%. Thus the charge equals 80% of £1,752, i.e. £1,402.
It is an 'earn now, pay later' system – the taxpayer above will get the full benefit up front, but will pay tax to effectively reduce or cancel out the gain. The 80% claw back essentially leaves the taxpayer above with £350 of the original £1,752 child benefit.
According to HMRC the new tax charge in relation to Child Benefit will affect approximately 1.2 million families. Approximately 70 per cent of these households will lose all of their Child Benefit, and 30 per cent will lose a portion.
HM Revenue & Customs (HMRC) will contact people earning over £50,000 about the new charge in the coming months with more details and to explain what they need to do next.
It is thought that the charge will be collected via a PAYE coding adjustment where possible. BUT HMRC suggest that 500,000 parents nevertheless, will have to fill out a self-assessment form, who currently don't have to, to declare the charge.
If you are one of these people, you will have to prepare a tax return for the year ended 5th April 2013 to reconcile your income and the amount of Child Benefit paid in the period from 7 January 2013 to the end of the tax year. This needs to be submitted by 31 January 2014, at which point the tax will also be due.
Despite fair intentions, this particular approach to ‘means testing’ child benefit has introduced a high degree of complexity into what has hitherto been a straightforward benefit with a practically universal take up.
Not only is there the anomaly that some families earning £100,000 with split income get it, while others with just one earner lose it at £60,000.
The fact its clawed back at the end of the year could also essentially lead to a child benefit overpayment issue – where people spend the cash but then have to pay it back. Imagine - an expected bonus (or getting a better job) may now mean a subsequent, possible unexpected tax bill to claw back child benefit!
Add to that the fact that we now have a 'who lives with who' issue, in terms of defining and monitoring partners, especially when a relationship forms or breaks up, and you have a ridiculously complicated system that is likely to end up causing confusion. And this is in the era of tax-simplification!
Even with good communication from HMRC to affected taxpayers, a lot of additional explanation and assistance is likely to be required.
How taxback.com can help
If you have any questions, please contact us and our professional tax technicians will be pleased to help.
For those who find they face the nightmare of having to fill out a 2012/13 self-assessment tax form to declare the charge, Taxback.com offer a fully compliant and efficient tax return preparation service for a flat fee of £110 including VAT – one of the most competitive on the UK market.