In January 2013, the High Income Child Benefit Charge (HICBC) was introduced by HM Revenue and Customs (HMRC). This charge applies if you or your partner receive child benefit and either of you have total income of over £50,000 per tax year. The HICBC will be charged against the partner with the highest income level.
HMRC introduced this as they believe it to be right to ask those on higher incomes to contribute more. This was set out in the Spending Review 2010 and will either reduce or remove the financial benefit of receiving the child benefit from higher rate taxpayers. If you or your partner receive child benefit and are likely to be affected by the Higher Income Child Benefit Charge then you should consider your options.
It is imperative to note the definition of a partnership as seen by HMRC. This includes:
• A married couple living together
• Civil partners living together
• A man and a woman who are not married to each other but are living together, or
• A man living with a man or a woman living with a woman who are living together as if they were civil partners.
Calculation Of The HICBC Tax
The HICBC tax charge is calculated using an ‘appropriate percentage’ of total child benefit received by both partners during the tax year. So for those who have income between £50,000 and £60,000, the amount of the charge will be 1% of the child benefit received for each £100 of income between £50,000 and £60,000. If your income exceeds £60,000 you are liable to the charge on the full amount of child benefit. For example, if you earn £51,000 and are the highest earner in your household (and you or your partner receive child benefit) then you will have to repay 10% of the child benefit recieved. It is important to note that the amount of Child Benefit payable will be unaffected by the new tax charge, if you earn over £50,000 you will be expected to repay some or all of the amounts received, calculated according to your income level. It is also important to note that it doesn’t matter if it is not the higher earner who receives the child benefit, it is the higher earner who will repay the child benefit regardless of who receives it.
In order to calculate the HICBC the adjusted net income of you or your partner will be used. This is calculated by taking the ‘net income’ which is the total of your income liable to tax less certain deductions such as trading losses and gross payments to pension schemes. This net income can then be reduced by any grossed up gift aid payments made and the grossed up amount of pension contributions which have received tax relief at source. Finally, any relief for payments to trade unions or police organisations deducted are added back to arrive at the net income figure.
I earn more than £60,000, how can I avoid all this hassle?
Claiming child benefit remains the same as previously and is normally done when the child is born. It is important that a claim is still made even if you plan to make an election not to receive payments so that the associated National Insurance credits for state pension are received and the child receives an NI number automatically when they reach about 15 years of age.
If you believe your income will be above £60,000 you can elect not to receive the child benefit at all. These elections need to be made as soon as possible to limit the HICBC charge for the year ended 5 April 2018. If you do elect not to receive child benefit and it is found that the total income falls within the band of £50,000 and £60,000 you can have the election revoked and child benefit reinstated.
What does this mean in terms of tax?
For those with incomes above £50,000 and who will find themselves subject to the HICBC this effectively means that your income in the range £50,000 to £60,00 will now be subject to an effective tax rate of 53% if you receive child benefit for one child. This increases proportionately according to the number of children you have (and therefore the amount of child benefit you receive). To illustrate, should you have 5 children the effective tax rate on income in the band stated above is 88%. For those with extremely large families, lets say 10 children, an effective tax rate of 156% is possible!
How do I pay the HICBC Tax
Paying the HICBC is through self assessment or PAYE. If you are not already completing a self assessment tax return and are subject to the HICBC you will automatically be required to register for self assessment. This is the case regardless of whether or not you meet any of the other Self Asessment criteria. Under Self Assessment, the obligation is on you, as the taxpayer, to initiate the registration process and ensure that you report your liability to the HICBC.
If you require any further information on the above or would like us to look at your circumstances in more detail then please contact us on 0141 848 7474. Similarly, if you now find yourself having to complete a Tax Return and require assistance then we shall be delighted to take care of this for you. Give us a call today on 0141 848 7474 or email us at firstname.lastname@example.org.