Though it was introduced almost a decade ago in January 2013, many parents and guardians may still be unaware of the High Income Child Benefit Charge (HICBC). This Child Benefit Tax applies to anyone earning more than £50,000 a year while claiming Child Benefit
for a child in their household.
However, many workers who are used to being taxed through their employer’s PAYE system won’t realise that the government expects them to submit annual self-assessment tax returns for HICBC. This has led to HMRC sending hundreds of thousands of letters about suspected non-compliance, hitting families with surprise bills and fines during a time that’s already financially difficult for many.
The Office for Tax Simplification (OTS) has been extremely critical of the HICBC
implementation, issuing recommendations for improvement that HMRC has yet to follow. The question is, can the Child Benefit Tax be fixed? Or are the problems with enforcing HICBC declarations and collecting HICBC payments only the tip of the iceberg? Should the government rethink the whole scheme?
What is the Child Benefit Charge?
In England and Wales, an adult responsible for raising a child under 16 years old (or under 20, if they stay in education or training) can claim Child Benefit. This is a four-weekly payment at a weekly rate of £21.80 for the first child and £14.45 per additional child. Only one adult can claim for each child.
With a monthly payment of £87.20 for an only child, this can add up to a tax bill of over £1,000 if the parent is required to pay it back. For families with multiple children, the High Income Child Benefit Charge
can claw back over £600 more for each additional child. While having an adjusted net income above £50,000 would make you a high earner, this can still drastically affect budgeting and cashflow.
For every £100
you earn above the threshold, you would have to repay 1% of the total Child Benefit you received that year. This may not seem like much, but if your adjusted income exceeds £60,000 then you’ll find yourself having to pay back every penny. If you don’t submit your HICBC tax return or fail to pay, HMRC could fine you 30% of the balance, plus a £100
late fee, and interest on top.
What’s even more confusing is that the HICBC only applies to one parent. If both parents earn above the threshold, the person with the highest earnings would be responsible for the HICBC, even if their partner was the Child Benefit claimant. Single parents will also have to shoulder the bill themselves.
The threshold for ‘high income’ has stayed the same since 2013, while the higher rate Income Tax threshold has surpassed it (reaching £50,270 in 2022). This has pushed even more parents into higher tax repayments. According to the Institute of Fiscal Studies (IFS), the HICBC affected 1 in 8 families when the higher rate threshold was £42,475 – and are now expected to affect 1 in 5.
With this unfair and mismanaged policy seeming to punish parents, what options do they have?
Can you opt out of Child Benefit Tax?
If your income is above the threshold, or your partner’s, this will make one of you liable for HICBC payments. You have the choice to receive Child Benefit and repay the proportional charge at the end of the tax year, or opt out of receiving Child Benefit completely to avoid paying the HICBC.
However, it’s not as simple as just declining state child support payments. Claiming Child Benefit allows you to gain National Insurance credits
and allows each child to automatically receive a National Insurance number
when they turn 16. To avoid losing out on these advantages, you should register for Child Benefit, but opt out of receiving payments by unticking the ‘zero rate’ box.
This is a practical course of action for those earning over £60k, who would have to pay everything back at the end of the year anyway. It can be a trickier decision for those earning above £50k but below £60k – some might prefer to claim Child Benefit throughout then pay a percentage back.
In some cases, where one parent earns just a little over the threshold, clever tax planning could help to take your earnings below £50k. This would remove your HICBC liability. For example, ‘salary sacrifice’ schemes increase your employee pension contributions, putting more into your retirement pot and reducing your income for various tax thresholds – though this also cuts your take-home pay.
Given the complexities of state benefits and income taxes, it’s best to seek professional advice before taking such steps. If you need help with financial planning, why not contact GBAC, accountants in Barnsley, also covering Sheffield and Leeds, for expert assistance from our tax consultants?
Call 01226 298 298
or email info@gbac.co.uk
whenever you’re ready for a tax consultation, and the GBAC team will discuss our comprehensive services with you.