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HICBC crashes parents’ pensions

12th Jan 2017
Tax Writer Taxwriter Ltd
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train crash
iStock_murengstockphoto_train crash

The claw-back of child benefit has had unintended consequences, including the loss of state pension for parents, and additional tax charges.

Train wreck

The high income child benefit charge (HICBC) was introduced to claw-back child benefit paid to higher earning families from 7 January 2013. The charge applies where the benefit claimant, or their partner, has annual adjusted net income of £50,000 or more. The full amount of child benefit is clawed-back if the higher earner’s annual adjusted net income is £60,000 or more.

Speaking in at the Digital conference in 2012, Rebecca Benneyworth made this prediction about the HICBC: “It is the train wreck we were expecting and it’s picking up speed. It’s going to be a disaster for us and even worse for HMRC.”

And so it has come to pass.

State pension

Research by the Royal London has found that more than 135,000 parents have decided not to claim child benefit for their children since 2013 in order to avoid the HICBC. This is the wrong approach, as in the long term it disadvantages both the parent and child.

If a non-working parent (usually the mother) doesn’t claim child benefit, she won’t receive national insurance credits for the period during which she doesn’t pay either class 1 or class 2 NIC, and the child is aged under 12 years. This will leave a gap in her NI record, and on reaching state retirement age she will receive a smaller state retirement pension.

Unlike the old form of state retirement pension, paid to people who reached state pension age before 6 April 2016, the flat rate state pension doesn’t allow an individual to receive a pension based on their spouse’s NI contributions.

Taxpayers can see their NI record on their personal tax account, and can use that information to identify any gaps in their NI payments or credits. Such NI gaps can be plugged for certain years by paying voluntary NI contributions, or by applying for home responsibilities protection for periods before 5 April 2010. 

Child’s entitlements

Where child benefit is never claimed in respect of the child, on reaching 15 years and nine months, the young person won’t be issued with a UK national insurance number. The individual will have to apply to the DWP for a NI number in order to work, open an ISA account, or receive a student loan.

Nil payment application

To avoid these difficulties the parent should apply for child benefit and tick the box to receive a nil payment. This is referred to as opting out of receiving the payment. The claimant (or their tax agent) can reverse this opt-out at any time, either using an online form, or by phone or post. It is essential that the initial child benefit claim is made as soon as possible after the birth of the child, as it can only be back-dated for up to three months.

SA return needed

Some parents are still unware of the need to pay the HICBC, in spite of the considerable coverage of the issue before the changes for child benefit were introduced in January 2013.

Where the family has received child benefit and the highest earner in the family has net income of more than £50,000, that person (not necessarily the claimant) must declare the child benefit received on their SA tax return. This may require the individual to register for self assessment, and complete a tax return just in order to pay the HICBC.

First HICBC case

This is what happened to Mrs Nonyane whose earnings exceeded £60,000 in 2013/14, but she wasn’t within self assessment. Although she received child benefit of £1,055.60 in that year, she claimed she didn’t know about the HICBC until HMRC contacted her in September 2015.

HMRC raised an assessment in November 2015 to collect the HICBC of £1,055.60, but Mrs Nonyane appealed [TC 05577]. This is the first HICBC case I have seen, and inevitably the taxpayer lost, as ignorance of the law is not a reasonable excuse. 

The case report doesn’t mention whether interest was charged on the late paid HICBC, or whether a penalty was raised for failing to declare a tax liability. HMRC does have the power to demand both interest and penalties in such situations.

Replies (4)

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By lme
16th Jan 2017 11:23

Really helpful article, thanks Rebecca!

Thanks (2)
By Kate Upcraft
16th Jan 2017 15:45

Another group who may be subject to HICBC in April 2017 are those whose salary goes up as a result of salary sacrifices being unwound as tax free childcare rolls out or due to the restrictions coming in, so this population of unaware taxpayers will undoubtedly grow

Thanks (1)
By BryanS1958
18th Jan 2017 10:20

I haven't checked this, but the new mortgage interest deduction rules could well lead to unsuspecting taxpayers having a HICBC. Under the new rules I believe that the net rental income BEFORE mortgage interest is added to other income to decide if a taxpayer is higher rate. This could well take many taxpayers over £50k, even though after deducting the mortgage interest they are really earning less than £50k.

Similarly on larger amounts of BTL income, adding the net rental income could take the taxpayers over £100k, so they lose their personal allowances, even though they may be highly geared and after paying interest they are only basic rate taxpayers.

Thanks (0)
By Brian Ogilvie
17th Feb 2017 11:17

Bryan - without question the HICBC will apply in many cases from April 2017 as a consequence of the progressive withdrawal of the ability to deduct loan interest from rental income.

Taking into account this, and the loss of personal allowance you mention,for many a marginal tax rate in excess of 100% will apply.

Some landlord clients are in for a terrible shock unless forewarned !

Thanks (0)