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Glenn Collins, head of ACCA UK technical advisory, take a look at how the new changes to child benefit affect you

The child benefit charge on ‘high income’ families is now part of our legislation. Section 8 and Schedule 1 to the Finance Act 2012 introduces a new Chapter 8 (sections 681B – 681HI) into Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), which is the part of the Act that taxes social security benefits. The new legislation comes into effect for 2012/13, although it only applies from 7 January 2013.

It is an income tax charge intended to ensure that child benefit is effectively removed from persons earning in excess of £50,000.

The charge is the ‘appropriate percentage’ of the total child benefit received by either partner in the fiscal year. Where the adjusted net income is £60,000, the appropriate percentage is 100%: [section 681C] and the total benefit is clawed back.

What is a partner?

Taxpayers are partners if:

  • they are a man and a woman who are married to each other and are neither separated under a court order, nor separated in circumstances where the separation is likely to be permanent
  • a man and a woman who are not married to each other but are living together as man and wife
  • the persons are two men, or two women, who are civil partners of each other and are neither separated under a court order, nor separated in circumstances in which the separation is likely to be permanent
  • the persons are two men, or two women, who are not civil partners of each other but are living together as if they were civil partners.

Adjusted net income

Adjusted net income is defined in section 58 Income Tax Act 2007. It is net income after deduction of (gift aid grossed up), pension scheme contributions and losses etc.

Weeks

Week means a period of seven days beginning with a Monday; it is in a tax year if, and only if, the Monday with which it begins is in the tax year. As the charge is by reference to weeks, it will apply only to those weeks of a fiscal year for which a partnership exists.

Example:

On 6 April 2013 Frances is a sole parent entitled to child benefit of £33.70 per week for her two children. Her annual adjusted net income is £55,000.

Percentage charge: (£55,000 – £50,000) / 100 = 50%

Frances is liable to a charge of 50% x £1752 (after rounding down). The charge would be £876. Note that this is the tax, not the assessable amount.

If child benefit is being paid, and a couple start living together, the charge will arise from the time the couple live together.

If a partnership breaks up the higher earning partner will only be liable from 6 April until the date the partnership breaks up.

There is an exemption if one partner had previously claimed child benefit on the basis that they were living with the child and after a period of less than 52 weeks, resumed the claim on the same basis. This would occur when a parent moves away temporarily or work purposes and leaves the child with a family member until they return.

Example:

Vicky and Andy are married, with three sons. Vicky receives child benefit for Ashley (£20.30), Daniel and Josh (£13.40 each). From 7 January to April, she receives (20.30 x 13) =£263.9 + (£13.4x2x13) = £348.4: rounded down to £263 + £348 total £611.

Andy earns £55,000 and Vicky earns £5,000.

Percentage charge: (£55,000 – £50,000) / 100 = 50%

Andy is liable to a charge of 50% x £611 (after rounding down).

The charge would be £305.

One of the major problems with this is the requirement for both partners to disclose their income. This caused a lot of difficulties prior to the introduction of separate assessment in 1990/91.

Election not to receive child benefit

Another potential problem arises from the election not to receive child benefit. If a partner’s income is in excess of £60,000, it may be preferable to disclaim the benefit in order to avoid the charge. The election takes effect in relation to weeks beginning after the election is made.

If the claimant decides to elect not to receive the benefit, because the expected income is over £60,000 and the higher income partner finds that this is not the case, the claimant can revoke the election.

The legislation provides that this can only be backdated up to two years, provided there would be no high income child benefit charge (because the income was less than £50,000). Therefore, if your income falls between £50,000 and £60,000, you would be worse off if you had elected not to receive the child benefit.

The practicalities

Child benefit should be claimed, normally when a child is born. This provides the entitlement to child benefit. Making the claim, even if the parents plan to elect not to receive the payments, is important if the parent wishes to obtain the National Insurance credits for state pension entitlement. It also guarantees that the child will be issued with a National Insurance number once they reach the age of around 15.

New claimants will be told about the new high income child benefit charge when they make their claim, to enable them to decide whether to make an election not to receive the child benefit and avoid the charge.

Existing claimants and their partners are not so easy to identify. HMRC need to get in touch with everyone who may be in the over £50,000 income bracket and either be a claimant or in a relationship with a claimant.

The charge

Child benefit itself is not liable to tax and the amount that can be claimed is unaffected by the new charge. The charge is levied upon the member of the household with the highest income.

Example:

On 6 April 2013 Lisa is a sole parent entitled to child benefit of £47.40 for her three children. Her annual adjusted net income is £55,000.

On 6 January 2014, Lisa lives with Johnny as man and wife. Johnny’s adjusted net income is £200,000.

For the period 6 April to 5 January, the child benefit received by Lisa will be clawed back by reason of her income. As there are 39 weeks in that period, the total child benefit would be £1848.60. As her income at £55,000 is between £50,000 and £60,000 there will be a charge to pay. This will be 50% x £1848, i.e. £924.

From 6 January, she is in partnership with Johnny and the benefit charge will be levied on him. This would be 100% x 13 x £47.4 = £616.20.

In certain circumstances, a person can claim child benefit even though the child is not living with them. This would occur then the person is paying for the child’s maintenance at least to the extent of the child benefit claimed.

Exemptions

Exemptions apply:

  • When an election has been made to disclaim child benefit
  • After the death of the child.

If you are ensure about how you may be affected by the new law you should consult a qualified accountant as every situation is different. More information can be found on the HMRC website