Child benefit: Effects of Budget 2012 changes

17th Apr 2012

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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The Budget announced that child benefit would be progressively withdrawn from households where someone earns at least £50,000. The benefit is withdrawn at the rate of 1% for every £100 above this threshold.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.

Further reading

HMRC tax impact and information note 'Child Benefit: Income Tax Charge for Those on Higher Incomes'

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By John Stokdyk

17th Apr 2012 12:44

More rumbles and grumbles within the profession

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.

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By pembo

17th Apr 2012 14:43

extraordinary

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.

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