What is the charge?
High Income Child Benefit Charge (HICBC) was introduced in 2013 and affects around 1.1 million families. The charge applies to taxpayers who have an adjusted net income over £50,000 in a tax year, where either themselves or their partner are in receipt of child benefit. Since 2013, hundreds of thousands of parents have lost some or all of the benefit, currently worth of £1,820 a year for a family with two children (you get £21,05 a week for the eldest or only child, then £13,95 a week for each additional child).
If both partners have adjusted net income over £50,000, the partner with the higher income is liable for the charge (regardless of which partner is in receipt of child benefit).
Those affected have a choice: carry on receiving child benefit but pay extra tax through the self-assessment system or give up the benefit and do not pay.
Calculating the charge
The charge is 1% of the amount of child benefit for each £100 of income on a sliding scale between £50,000 and £60,000. For those earning more than £60,000 the charge is 100% – in effect, they receive no child benefit. For example, child benefit for two children is £1,820 per year. For a taxpayer, whose income is £54,000, the charge will be £728. This calculated as follows:
Step 1: £1,820 child benefit divided by 100 = £18,20 (which is 1% of the child benefit award)
Step 2: £54,000 (adjusted net income) minus the £50,000 threshold = £4,000 of excess income
Step 3: £4,000 of excess income divided by £100 = 40 (the number of £100s of excess income)
Step 4: £18,20 (1% of the child benefit award) multiplied by 40 (the number of £100s of excess income) = £728.
HMRC has produced a calculator on the GOV.UK website that calculates the tax charge you or your partner may have to pay.
Electing not to receive child benefit
Child Benefit claimants can elect not to receive the child benefit to which they are entitled if they or their partner do not wish to pay the new charge. The claimant may subsequently decide to withdraw that election if they or their partner are no longer liable to pay the charge – this is called revocation.
To stop receiving payment of Child Benefit or to opt in again or if you wish to inform of any changes in circumstances, claimants need to contact HMRC. The Child Benefit Helpline is 0300 200 3103. Alternatively, you can do this via the HMRC email service or via your online account or by writing to the Child Benefit Office:
HM Revenue and Customs – Child Benefit Office
PO Box 1
Newcastle Upon Tyne
How to avoid the charge?
The child benefit tax charge is based on your adjusted net income. This is your total taxable income (i.e. basic salary plus benefits you get from your job, rental income and so on), minus things such as pension contributions and gift-aided donations to charity.
The most obvious way to reduce your adjusted net income is to pay more into your pension. Any contributions made into a company or personal pension scheme will reduce the final amount of adjusted net income. For example, you could pay additional voluntary contributions into your occupational scheme.
Making charitable gift aid donations also has the same effect of eliminating the tax on the child benefit and relieving the gift at the taxpayer’s highest income tax rate.
There are other options on how to reduce tax liability and save money. Please feel free to contact our team of professionals on 0208 249 6007 for free consultation. Every client is special for us and we aim to find the most tax-efficient method for each taxpayer.
Wirtten by Irina Stucere