From January 2013 a person who earns more than £50,000 must advise HMRC if they receive Child Benefit personally,
or if they are the higher earner of a couple where their partner receives Child Benefit. If you fall into this category you may be receiving a letter soon from HMRC advising you of the new tax charge.
We have summarised below the details of the tax charge that will apply from 7 January 2013:
1. Child Benefit is not being made liable to tax, the amount claimed is unaffected. The tax charge simply claws back the value of the benefit of those with higher incomes.
2. Child Benefit claimants can elect not to receive benefit if they or their partner do not wish to pay the new tax charge. This election can subsequently be withdrawn if circumstances change.
3. The amount of the tax charge will be collected through Self Assessment and PAYE.
4. The tax charge will be 1% of the amount of the Child Benefit you receive for every £100 of income you earn in excess of £50,000. This sliding scale will apply to earnings up to £60,000.
5. The tax charge will recover all of the Child Benefit you or your partner receives if your income exceeds £60,000.
6. An individual who has an income over £50,000 but does not receive Child Benefit themselves will only be subject to the tax charge for any part of the tax year during which they live with a Child Benefit claimant whose income is below £50,000.
A couple or partnership affected by these new rules 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.
What planning could reduce this tax charge?
If the highest earner’s income is marginally over £50,000 the simplest way to reduce or eliminate this new tax charge is to reduce your income for tax purposes. One way that you can do this and retain benefit for your family is to make a lump sum contribution into your pension scheme. You will create higher rate tax relief on the contribution and save all or part of the higher Income Tax charge to recover Child Benefit. Depending on the number of children you claim for, this could create tax savings of over 70%.
Couples affected would be wise to seek professional help to ensure this new tax charge is kept to a minimum, especially for families where the highest income earner’s income only marginally exceeds £50,000.