A recent paper produced by the Tax Law Review Committee of the Institute for Fiscal Studies (IFS) has shone a light on the supreme unfairness of the way in which the High Income Child Benefit Charge (HICBC) operates to remove Child Benefit when the claimant’s (or their partner’s) income exceeds £50,000.
At this point, the Child Benefit starts to be tapered away and, at £60,000, is completely removed.
The HICBC has been heavily criticised for the way two-income families, where both earn less than £50,000, are treated compared to a single parent earning more than £50,000. Two earners on £49,000 a year, so a combined income of £98,000, lose no Child Benefit.
There is hope the Chancellor will address the single-parent family position in the March Budget. The income limits could also do with being increased. The IFS paper may serve to increase that hope, though I suspect nobody is holding their breath.
In the meantime, it is important to be aware of the details when having tax year end conversations with clients who may be caught out.
Child Benefit is money paid by the government to anyone responsible for bringing up a child – typically, a parent or carer. A “child” for this purpose is one up to the age of 16, or 20 if in approved education or training.
Only one parent (or carer) can claim on behalf of a child but you can claim for each child in your care. For the current 2023/24 tax year, you get £24 per week for the eldest or only child and £15.90 per week for any other children.
Child Benefit is paid every four weeks, straight into the claimant’s bank account.
The aim of the HICBC is to make any recipient repay some or all of their Child Benefit back as tax if they or their spouse, civil partner or partner (who is not married but living with them) has an individual adjusted net income exceeding £50,000 per year – even though the basic rate threshold (including the personal allowance) stands at £50,270.
Where a claimant has adjusted net income of between £50,000 and £60,000, the HICBC will be a 1% deduction of the amount of Child Benefit for every £100 of income which exceeds £50,000.
If either the taxpayer or the taxpayer’s partner has adjusted net income which exceeds £60,000, the person with the higher income will be liable to the charge on the full amount of Child Benefit – i.e 10,000/100 = 100%.
Individuals who have adjusted net income above £50,000 but are not entitled to Child Benefit themselves will only be liable to the charge for any part of the tax year during which they are living with someone who claims Child Benefit and whose own income is below £50,000.
The charge is assessed through self-assessment in the normal way, either through payments on account and balancing payments or through the tax code via PAYE. If payment is made through the tax code, the taxpayer (i.e. the person with the highest adjusted net income) will still be required to complete a self-assessment return
So, what planning could be considered?
If either partner’s adjusted net income is above £50,000 but below £60,000, the claimant may still wish to receive Child Benefit payments because the tax charge will be less than the amount of the benefit.
If either partner’s adjusted net income exceeds £60,000, the person with the highest income will be liable to the charge on the full amount of Child Benefit. In this event, it is possible for the claimant to elect not to receive the benefit by contacting HM Revenue & Customs (HMRC), thereby negating any tax charge. If circumstances change and income falls below £60,000, it is possible to revoke the election (for up to two years).
If a claimant decides to stop receiving Child Benefit payments, this won’t affect entitlement. So, as long as the claimant or their partner are entitled to receive the benefit, a claim form should be completed for any new children.
This is because entitlement to Child Benefit can help you qualify for National Insurance (NI) credits, which can protect entitlement to state pension and ensures the child is automatically issued with an NI number prior to their 16th birthday.
Note, annual NI credits for state pension entitlement are only granted up to a child’s 12th birthday. HMRC’s fact sheet on adult childcare credits explains this .
Where the working parent of a couple has registered to receive Child Benefit rather than their non-working partner, the non-working parent does not receive any NI credits and may therefore lose entitlement to future state pension. NI credits can be transferred between parents of children under the age of 12 using HMRC form CF411A (however, backdating is currently effectively limited to a single tax year.)
Meanwhile, it is possible to reduce an individual’s income with gross pension contributions or gross gift aid payments. Here, not only would a taxpayer be increasing their pension pot on retirement but they could also prevent being caught by the HICBC.
Further, they can continue to receive Child Benefit payments in the normal way, resulting in a beneficial outcome for all parties concerned.
Where income includes a chargeable event gain on a life policy, the full gain, not the top-sliced gain, is included to calculate adjusted net income for the purposes of Child Benefit and the HICBC.
Note that a top-sliced gain can only be used in the calculation of adjusted net income for the purposes of determining the personal allowance when calculating the tax on the top-sliced gain in the second part of the top-slicing relief calculation – it cannot be used to reduce adjusted net income to reduce or avoid the HICBC, or in any other situation.
Tony Wickenden is managing director of Technical Connection
