This article explains how the tax charge works for individuals affected by the high income child benefit charge.
Who is affected
From 7 January 2013 individuals with ‘net adjusted income’ in excess of £50,000 will pay a tax charge on their child benefit. This charge will be at a rate of 1% for every £100 of income between £50,000 and £60,000. This means that for an individual with income of £60,000 the tax charge will be equal to the full amount of the child benefit.
An individual may be liable to this new tax charge if they, or their partner, have ‘net adjusted income’ of more than £50,000 and one of them gets Child Benefit or contributions towards the upkeep of a child.
‘Net adjusted income’ is defined in section 58 of the Income Taxes Act 2007. Broadly it is the total income on which an individual is liable for tax, less the gross amount of any personal pension contributions, or third party contributions. However, remember that this is not the calculation for the actual payment of income tax and National Insurance (NI), and the full income before removal of the pension contribution will be subject to full tax and NI. For more information visit the HMRC website.
The current rates (2016/17) for child benefit are:
Eldest or only child £20.70 per week/£1076.40 per annum.
Additional children – per child £13.70 per week/£712.40 per annum.
Bob's adjusted net income is £54,000 and has two children so is entitled to Child Benefit of £1,788.80 for the period from 6 April 2016 to 5 April 2017.
The tax charge will be worked out as follows:
Step one: income over £50,000 = £4,000
Step two: determine the percentage rate to be applied to the result from step one, so £4,000 ÷ 100 = 40 (%)
Step three: £1,788.80 x 40% = £715.52
The tax charge will be = £715.52
What to do if the individual is affected by the tax charge
If an individual is affected by the new tax charge they can either keep receiving Child Benefit payments and pay the tax charge or tell the Child Benefit Office that they want to stop receiving Child Benefit payment (see note below).
Pay a pension contribution to reduce 'adjusted net income' to £50,000, resulting in keeping the full amount of child benefit, increasing their pension savings whilst benefiting from 20% tax relief at source from the pension provider and a possible further 20% tax relief in higher rate relief.
One point to note
If the individual has a child under 12, are looking after them at home or work but don’t earn enough to pay National Insurance contributions then Child Benefit will help them qualify for ‘credits’ for being a parent or a carer. These credits count towards the State Pension. An individual may decide not to receive the Child Benefit payments, because they don't want to be liable to the tax charge, however it’s important to still fill in a Child Benefit claim form, even if you don’t want to get the payments. This is because if you are entitled to receive Child Benefit, you can still qualify for credits to protect your State Pension.