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, reports Robert Leach.
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The Budget announced that child benefit would be progressively withdrawn from households where someone earns at least £50,000. The benefit is withdrawn at the rate of 1% for every £100 above this threshold.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 £13.40 (see comment below - Ed) 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.
Risk of a new tax penalty
There is another practical aspect. It is the duty of the person who is liable to pay the charge to notify HMRC.
Most employees do not fill in a self-assessment tax return at all as their income is taxed at source under PAYE. From this tax year, all employees earning more than £50,000 and also receiving child benefit must notify HMRC. There will be penalties imposed if the person forgets or did not realise. No consideration seems to have been given to what happens if the mother will not tell her partner whether she is claiming child benefit or not. You could have a situation where someone believes that the mother is not claiming the benefit when she is.
A final point to note is that the new income tax charge arises when a person is entitled to receive child benefit, not when she does receive it. So if the mother simply does not bother to collect the benefit, the income tax charge is still payable but she is still entitled to receive it. The income tax charge can only be avoided if the mother specifically elects not to receive it.
HMRC tax impact and information note 'Child Benefit: Income Tax Charge for Those on Higher Incomes'