11 June 2018 | Taxation
The High Income Child Benefit charge can result in a parent having to repay the full amount of Child Benefit received. But not claiming Child Benefit may not be the best way to deal with this.
Anyone who is responsible for a child should claim Child Benefit at a rate of £20.70 per week for the first child, and £13.70 for each subsequent child. What’s quoted are the 2018/19 rates and changes should be updated on the HMRC Child Benefit pages once they occur.
If more than one person is looking after a child, then they can decide between them which person gets the benefit, and in the event of a dispute then HMRC have the power to decide who should receive the benefit.
In most cases, the mother gets the Child Benefit which has important benefits for her. The lower earning or non-earning parent should receive the payment, as that is better.
In addition to the obvious cash advantage, anyone receiving Child Benefit will also receive full credit for National Insurance.
Taxpayers used to know this as Home Responsibility Payments but it is now more simply known as National Insurance Credits.
In essence, Child Benefit is the same as if you were earning a wage and paying National Insurance. Although unlike wages, Child Benefit is tax-free on receipt.
Actually, that last paragraph is not strictly correct:
If either the person receiving Child Benefit, or their partner, receive taxable income in excess of £50,000 in the tax year then the amount paid is repayable at a rate of £1 for every £100 your taxable income exceeds £50,000.
Effectively a 1% tax charge capped at the amount of amount you (or your partner) received for the tax year.
The calculation is based on the highest income, irrespective of who receives the child benefit.
One option that many adopt is to simply disclaim the Child Benefit. This is simple, but it has the adverse effect of removing National Insurance credits from the lower earner. This could have a very serious effect on their pension entitlement in later years.
In fact, there are actually three choices available to you:
Clearly, the later is the best option as there is no worry about tax bills, and no loss of the benefits. However, you have to stop claiming the entire entitlement.
To opt for the third choice, you simply need to complete a simple online form or phone the tax officeto have your status updated.
If your income is nearing £50,000, then you can action some choices to keep your income below the limit.
The most common advice is to increase your pension contributions, or to opt for a salary sacrifice. In our view these can cost you in the short term. You are better to comprehensively plan for the effect of the charge.
This is the sort of pragmatic tax advice we give to our clients. We always look at their tax situation in the round. If you want to benefit from our services, contact Angus Nicolson today.
The information provided is for general information purposes only.
Legislation and details may have changed since this was written. The text may not include all matters that are relevant to your individual situation.
You should not make decisions, or refrain from making decisions, without taking further professional advice about your specific circumstances.
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