What is it?
The child benefit tax charge comes into play when an individual or their partner earns in excess of £50,000. This applies if someone else gets Child Benefit for a child living with you and they contribute at least an equal amount towards the child’s upkeep and it does not matter if the child living with you is not your own child.
For every £100 of income above the £50,000 limit, 1% of the sum of all the child benefit paid is taken as a tax charge. When a person’s income is £60,000 or more, the entire benefit is lost. The income used for calculating this is is your total taxable income before any personal allowances and less things like Gift Aid and pension contributions.
Who pays the charge if more than one partner earns over £50,000?
If your partner’s income is also over £50,000 but yours is higher, you’re responsible for paying the tax charge. A ‘partner’ is anyone that you’re not permanently separated from who you’re married to, in a civil partnership with or living with.
What if the tax charge applies to me? (the most important part)
If the above applies to you there are three options. You can choose:
- not to claim the benefit, or
- claim the benefit, but opt not to receive payment of it, or
- receive the benefit but pay some or all of it back to HMRC
To stop the benefit, you can either fill in an online form or write to HMRC. Alternatively, you can continue to receive the benefit and then pay the charge via self-assessment.
Firstly, the key thing here is that if you are caught by the charge, you need to notify HMRC regardless of which option is chosen above. If you do not, HMRC may continue to pay the benefit and you will have to pay the charge at the point that HMRC become aware that it was due. This could lead to a large liability if the benefit remains in payment for a number of years.
What should I be aware of when deciding which option to take?
Child benefit is linked to the national insurance regime. This means that in addition to the benefit provided, it:
- provides the child benefit claimant with national insurance credits until the child is 12, which can help fill gaps in their national insurance record for State Pension if they are not working
- is the main way children are issued a National Insurance number (NINO) as they turn 16
Missing out on crucial national insurance credits where a parent decides not to work and remain at home may lead to a reduction in their state pension. This reduction in state pension can be substantial if a parent has a number of children over a long period of time and could have been easily avoided if they had been fully aware of the importance of registering.
The other problem is that the child will have to take an additional step to prove their identity to get their national insurance number which can be quite onerous.
For those who have income of £60,000 or more, registering a claim for child benefit but then opting not to receive it is the only way to avoid paying the tax charge and the associated administration, such as completing a tax return, while preserving national insurance entitlements. However, many may consider it easier to simply not register on the grounds there are no financial benefits in doing so without realising the future problems that may be created.
If you are caught by the charge, there are ways to mitigate this. For example, pension contributions act as an income reducer for tax purposes so paying the equivalent of any earnings in excess of £50,000 (where possible) into a pension will bring your income back down to £50,000 for tax purposes and therefore you will be able to reclaim the full benefit.