Child benefit: Effects of Budget 2012 changes

Tax experts are warning that child benefit could be the next area for controversy arising from the March Budget - if there is anyone willing to campaign on behalf of parents with large families earning more than £50,000. Robert Leach reports.

Next year many fathers will have the unpleasant shock of a tax bill for several hundred pounds because of child benefit paid to the mother.

The Budget announced that child benefit would be progressively withdrawn from households where someone earns at least £50,000. The benefit is withdrawn at the rate of 1% for every £100 above this threshold. So anyone earning £60,000 or more in effect gets no child benefit. This affects about one household in seven where child benefit is claimed.

This new provision throws up many anomalies. For example, it means that a two-income couple can earn £99,000 a year and keep all their benefit, while a single-income couple on £60,000 lose all theirs.

It also means that a couple can be better off separated than married. If a low-income mother no longer lives with the father she may be able to keep the benefit that would otherwise be lost if they were still together. This is not what we thought the prime minister meant when he said that marriage would be recognised in the tax system!

New income tax charge

We now know that this withdrawal of benefit is to be by a new income tax charge called “high income child benefit charge”. This is charged on the higher earner. So the mother may still receive the benefit while the father has to pay it all back through additional income tax. It does not need much imagination to think of the problems this could cause.

If the mother does elect not to receive the benefit, she may at any time revoke the election and receive child benefit again.

However, there are other implications.

For the 2012/13 tax year, child benefit is £20.30 for the first child and £7.40 for the second and subsequent children. This works out at £1,055 a year for one child, £1,752 for two children, £2,449 for three children and so on.

For one child, this creates a marginal rate of tax of 50.6% on the slice of income between £50,000 and £60,000. For two children, the marginal rate is 57.5%. It increases by about 7% for each subsequent child. For eight children, the marginal rate is 99%; for nine, the marginal rate is 106%.

In a full tax year, this would give a father of two children an additional tax liability of £1,349. There is some comfort in that the scheme does not start until 7 January 2013, which leaves only three months of the tax year. So the maximum amount a father can pay in 2012/13 is a quarter of this figure, about £337.

Electing not to receive child benefit

It is possible for an election to be made so that child benefit is not received in the first place. In such cases, no high income child benefit charge is made. However, the right to make this election rests solely with the person who receives child benefit. This is usually the mother, so she alone can decide whether her partner is hit with this new charge.

A person can be liable for this new charge if they are the person receiving child benefit or their “partner”. This means a husband, wife or civil partner, or something with whom the person is living as such. So someone who moves into a house with a person receiving child benefit could find that they are liable to an additional income tax charge as a result.

Continued...

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Comments
John Stokdyk's picture

More rumbles and grumbles within the profession    1 thanks

John Stokdyk | | Permalink

Robert's article is not the only one to flag up this issue, which has been somewhat overshadowed by the other Budget 2012 controversies around granny tax, pasties and the effect of the proposed cap on income tax relief on charities. Perhaps if there was someone willing to campaign on behalf of parents with large families earning more than £50,000, we'd hear more about this subject.

Rebecca Benneyworth flagged up the eye-watering marginal tax rates in her Budget briefing note for small companies.

She noted how the taper of benefit and withdrawal of tax credits and leving 1% of the award for every £100 the income exceeds from £50,000 to £60,000 would produce some "very aggressive tax rates" - including 100% for those with more than seven kids.

The “adjusted net income” will be used, so the tax charge cannot reliably be calculated until after the end of the tax year, as it allows for the deduction of gift aid payments (gross) and pension contributions (gross amount), she added.

The charge will commence on 7 January 2013, based on the award in place at that date, and will use the income for the whole of 2012/13 as a basis for the tax charge. The tax will be collected after the year concerned, and it is expected that it will be coded out in arrears for PAYE, or collected through the self assessment system for those to whom it applies.

AccountingWEB members have also been up in arms on an Any Answers thread Child Benefits - Son of Tax Credits 

"The whole thing is a mess. And what for? We’re typically talking of about £1752 for two children," complained original poster kevinringer. "HMRC could well spend more in administration trying to identify these couples than they will raise in the claw back."

With simplification still on the government's agenda, several members suggested that the best thing to do would be to abolish Child Benefits all together.

pembo's picture

extraordinary

pembo | | Permalink

Who is advising these muppets ? Thought the charity cap fiasco was bad enough but this caps the lot. GO said "Under the new system 90% of families, around 750,000 households, would continue to receive child benefit ". So say the average is £1752 for 2 kids then full clawback of the other 10% of around 83000 households = a saving of about £145M. This equates to about 0.3% of the annual interest cost of our sovereign debt. Maintaining the trusty political spirit of being disingenuous he did not say "would continue to receive full benefit" so suppose it may be as much as 0.5% (falling rapidly)

So say (in the admittedly unlikely scenario) that the main earner with a family of 9 earns £60k then if I get this right it would mean that if they gave £8000 (net) to charity then they would actually be better off by £635 ? (£8000 less £6635 saved benefit (£13.40 for subsequent kids not £7.40 as above) less £2000 higher rate relief). Or does this fall foul the GAA rules to be introduced as applied to charitable donations ?

You couldn't make it up.They're all mad.

Stark raving mad    1 thanks

alistairthurlow | | Permalink

This is just bonkers. I am sure my 10 year old son could come up with a better solution to whatever problem the government is trying to solve with child benefit.

I have always thought it unfair that £100 of child benefit is worth £100 to a non-taxpayer but £167 to a 40% tax payer but surely the answer to that is to make child benefit taxable income in some way rather than create the complicated nonsense described above. At least it will drum up extra businness for accountants.

 

John Stokdyk's picture

Thanks for the comment - and correction

John Stokdyk | | Permalink

The text has been amended to reflect the correct figure for second and subsequent children. Our apologies for the error and thanks for pointing it out.

Surely simplicity is the key here    3 thanks

Eyrie | | Permalink

Attempting to tax child benefit will always cause problems since it is deemed to be paid to the mother.

So to reduce the cost to the taxpayer without complicating matters it would be far simpler to restrict it to the first two children only and remain tax-free.  People can still choose to have larger families if they want.

Problem solved.

Not my child !?

mikewhit | | Permalink

And of course the other anomalous scenario is where there are children from a different partner living in the family - the mother (for the sake of argument) might be getting CB for both, and the earning partner is getting the tax clawback for both, but only one is his child !

OK the household is getting the CB in the first place, but some couples where "the other guy" is an issue, might feel aggrieved.

If it's all being clawed back, it might make economic sense then to let the other non-resident partner's household claim the CB instead - but that might then have implications for custody of the child ...

pension

bridgetflett | | Permalink

Am I correct that a mother's right to state pension 'years' is linked to her receiving child benefit?

If she elects to opt out of child benefit to save complications but doesn't work she could lose out later on, especially if her circumstances changed.

Child benefit scandal

anthonydyer | | Permalink

Very good article. Very pertinent to me as I face a tax cliff due to having three kids and income above £60k. I'm going to need to earn over £4k extra next year just to offset this. As I and many others will have to complete tax returns now, couldn't one more complication be added in whereby we can utilise our wives' unused personal allowance to offset the CB tax charge?

Quite why the opposition and press have allowed themselves to have a field day on pasties, when this complete hatchet job on tax policy is one of the real scandals to come out of the recent budget, can only be guessed at. This really has to make it onto the political agenda as it is not gaining traction.

The anti-simplification that this creates, which goes against what we've been led to expect from the current administration, is hard to understand. Didn't we all see the problems coming when Child and Working Tax Credits were put in place? Well, I see the same and worse happening now. The administrative cost of all those extra tax returns and calls to HMRC for explanation are going to cost a fortune in admin.

I've written to my MP telling him not to expect me to turn out to vote in the next GE, but no response as I don't think they believe anyone will remember by then. They will!

Marginal rates

Paulsoper | | Permalink

The marginal effect is actually even worse than this article suggests because it only takes income tax into account.  Assuming that a person receiving the benefit is most likely to be either employed or self employed then it will be necessary to take NIC into account.

The effective rates are then 52.5% with one child rising to 94.37% with seven children.  As the article suggests with eight or more children the marginal rate exceeds 100% and any taxpayer would be advised to elect not to receive the benefit or make gift aid donations or pension contributions.

However if you own your company employer's NIC would need to be added to the mix in which case the marginal rates are even more eye-watering, 58.09% with one child rising to 96.44% with 5 children, any more?  Take action - dividends instead of remuneration etc, with eight children the marginal rate is 117.35%!

Of course with your own company income splitting becomes possible too...

I suspect that Bridgetflett is right about benefit entitlement as well, but you only need 30 to get a full benefit, and the right can be protected by Class 3 contributions, with pension age steadly moving upwards as well even if the pension entitlement is endangered it is more than likely that the 30 year target will be met - always assuming that they don't change that as well of course...

Designed by Committee...    1 thanks

Ian McTernan CTA | | Permalink

Yet another seemingly good idea blown out of the water by the Treasury, who seem determined to make any changes as complex as possible, and add yet another layer to an already ludicrously complex tax and benefits system.

Whoever thought this new charge was a good idea should be sacked.

I never thought I'd say this, but 'self assessment' is a failure when so many things depend on your household income, so let's go back to the old system and complete Returns, etc based on 'household' income, ie partners living together, married couples etc (not sons and daughters earnings) and amend allowances , etc to reflect this reality.  I know, some people will object to their partner knowing their income, but if you don't trust them with that information what else are you hiding from the person you love....

Someone needs to redesign the whole system from scratch and put an end to this endless tinkering and creating yet more charges on the higher paid, most of whom will have no clue a charge evens exists until the Revenue impose a huge fine and penalties for not telling them!

One universal, means tested benefit with multiple components and a simple application process with resources solely devoted to compliance checks including home visits (unannounced, right to enter) would go a long way to resolving a lot of these issues.

It's way past time we started pushing people away from benefits dependency (tax credits...crazy idea!) and started finding ways to support themselves.  I know there are many who deserve and require the benefits they receive but there are a lot out there who need to be 'encouraged' to be more pro active in being a productive member of society in some way.

 

/end rant

Nick Graves's picture

Smokescreen

Nick Graves | | Permalink

It was abundantly clear the pasties thing was a smokescreen designed to distract the masses from something else.

I've always tried to presume stupidity before malice, using the Occam's razor principle. Such ridiculous legislation must however, be the product of an evil mind.

 

 

 

CB clawback, NIC and state pension

Tim Good | | Permalink

Bridget need not worry - electing not to receive CB will not affect the state pension accrual. See http://www.hmrc.gov.uk/budget2012/cb-income-tax.htm#a8.

I don't think that the income tax charge will extend to NIC.

Good but...

Paulsoper | | Permalink

Hi Tim, glad Bridget doesn't need to worry, but as the Q&A states you must still claim even though by electing you won't receive (!!!) - I suspect many people in future will simply not claim believing there to be no benefit.

but if you earn the marginal income to be subject to clawback, unless it is savings income, it will be subject to NIC as well as income tax and clawback hence with two children a payment of income of £1,000 will be subject to income tax of £400, NIC of £20 (whether class 1 or 4) and clawback of £175.20, total deductions of £595.20.

If it's your own company to pay £1,000 of income the employer (you yourself in corporate guise) will have to pay £160.09 NIC on top.

Office for tax simplification??

fionamcke | | Permalink

Where are these people when we need them?

Has anyone estimated how much this will cost HMRC to collect and police?

child benefit

philrunnermanly | | Permalink

this "clawback" is not new- if my memory serves me well the forerunner to child benefit(was that called family income supplement) did not always benefit higher rate taxpayers who were therefore subject to a "clawback" where income exceed a particular level- once a certain level of income was reached the tax on the clawback exceed the amount of the supplement claimed

 

Child Benefit, tax credits etc.

tedbuck | | Permalink

The Government is barmy - but we all know that - common sense has deserted them.

Why not ........ make all benefits taxable? Then people earning £25,000 wouldn't be paying so much to support those receiving £25,000 for doing nothing. It also solves the problem of the 'rich' as they would pay more tax on it all. Then you can make the system simple, deduct tax at source which helps the Government's cash flow and at the same time may persuade some of the people who don't know they have to do tax returns to do them. Not much admin coist to receiving a tax return on HMRC's computer.

Wails of anguish from the do-gooders no doubt but it might help stop people breeding kids for the child benefit.

Second step  .. sack the Treasury staff as from what I hear most of them are incompetent anyway - they certainly don't seem capable of thinking beyond their noses or the office credit card.

Sorry lots of rants today.

 

The forerunner

honesty | | Permalink

to child benefit was family allowance. FIS was the forerunner of WTC.

RebeccaBenneyworth's picture

It is worse than this

RebeccaBenneyworth | | Permalink

The tax charge applies to the highest earner in the household (the legislation allows for three or more parties in the household!!). So how do you know whether you are due to pay a tax charge when you live as man and wife with someone who does not disclose their income to you? How will HMRC know who should be in this tax charge - they don't necessarily know who you live with or whether they receive child benefit, and the taxpayer can't know because he doesn't know how much his wife's income is....

Starting a new tax rule on 7 January is a bit of a novel idea too!

And as for marginal tax rates - for the next year or so in any event families with 5 or more children will still be getting child tax credit at £50,000. This puts the rate for 5 kids up a bit and the rest up by 41% in each case. Marginal rates into the 150% + with a very large family (9 or more).

How will we know when to complete this charge on a taxpayer's return?? Hasve you warned your clients to keep a record of the child benefit coming into the household from 7 January?

And what about the chap whose wife ran off with the milkman during the year, but in respect of which he faces a tax charge to claw back CB from before she left. Not a happy little bunny!

7 January?

Paulsoper | | Permalink

The 7 January date isn't as much as a problem as it seems, the date of payment is the same for all recipients so the clawback will simply apply to a smaller known figure for the first year and a full year figure in subsequent years.  The only time this might vary is where the benefit begins or ends during the year which will need watching.  However this demonstrates perfectly what happens when you let politicians loose on the tax system.

Let politicians loose on the tax system

Huw Williams | | Permalink

Didn't policitians think up the tax system in the first place, so who better to know how it works and make sensible changes?

Fortunately this particular piece of legislation will only apply in limited circumstances (families with income and children) so will only matter to a small proportion of the population / electorate.  If it were to affect large numbers, I am sure politicians would have realised and changed the rules.

Nick Graves's picture

It's a gravy train, though.

Nick Graves | | Permalink

tedbuck wrote:

The Government is barmy - but we all know that - common sense has deserted them.

Why not ........ make all benefits taxable? Then people earning £25,000 wouldn't be paying so much to support those receiving £25,000 for doing nothing. It also solves the problem of the 'rich' as they would pay more tax on it all. Then you can make the system simple, deduct tax at source which helps the Government's cash flow and at the same time may persuade some of the people who don't know they have to do tax returns to do them. Not much admin coist to receiving a tax return on HMRC's computer.

Wails of anguish from the do-gooders no doubt but it might help stop people breeding kids for the child benefit.

Second step  .. sack the Treasury staff as from what I hear most of them are incompetent anyway - they certainly don't seem capable of thinking beyond their noses or the office credit card.

Sorry lots of rants today.

 

Good idea I agree, it'd be a start.

Ultimately, I'd like to take it a stage further; Actually PAY everyone a non-taxable personal allowance and that's it; end of. No more help. Anyone not on the d-base loses out.

Enough to survive on, no more means-testing.

Tax everything earned over & above it on a straightforward basis. So long as they pay their tax, they've no need to worry about 'cheating' the dole or any intrusive form-filling.

You could retire a whole army of tax-absorbing zombies. And me, with a bit of luck.

 

 

 

 

RebeccaBenneyworth's picture

Not many?    1 thanks

RebeccaBenneyworth | | Permalink

I understand that somewhere around 4.5 million letters will be sent to those with income of more than £50,000 to establish how many of them live with someone in receipt of child benefit or are in receipt of child benefit themselves. That's quite a lot of letters and quite a lot of cost. Then you have to follow up the no replies - quite high I suspect. Then you have to match the records. Then you have to check who is the higher earning of the two, but using net adjusted income, which you can't do unless you bring the whole lot into self assessment.

Paul, you are assuming that the computer that pays CB can give reliable information.... if you think about data on state pensions fed into the tax system there isn't much evidence to support that assumption. Babies will be born, children will leave school unexpectedly, partners will move on, or in with someone else who has children from a previous relationship. The test is "in a week" so you'll need a weekly fix on their living arrangements - and that assumes they know their partner's (or indeed partners' as the leg allows for it) income for these purposes.

I still say this is the most stupid thing that has ever been done to the tax system. HMRC needs to devote all of its time to bringing in the money, as it is ever reliably stripped of more money to run on. Please will someone in Government read this and think about it!

I think we all agree?    1 thanks

alanpoole | | Permalink

As a firm of accountants we are of course delighted that various governments have made the tax system more and more complicated in their efforts to disguise their tax take, or not offend their voters. Our clients need more advice.

As a fair minded individual however, I think it's a scandal.

In this case, the answer to putting the money where it is needed seems obvious. Scrap child benefit and increase child tax credits.

Self Assessment and child benefit

DipD | | Permalink

My partner has an income higher than the £60,000 threshold but I don't. Child benefit for 3 kids has always been paid to me, into our joint account. All letters regarding child benefit have been sent to me in the past. Is it legal for HMRC to demand that my partner declares child benefit as part of his income rather than mine? We both will complete self assessment tax returns for 2012-13.

Thanks!