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High Income Child Benefit charge

Anyone who is responsible for a child should claim Child Benefit at a rate of £20.70 per week for the first child, and £13.70 for each subsequent child.  What’s quoted are the 2018/19 rates and changes should be updated on the HMRC Child Benefit pages once they occur.

High Income Child Benefit chargeIf more than one person is looking after a child, then they can decide between them which person gets the benefit, and in the event of a dispute then HMRC have the power to decide who should receive the benefit.

In most cases, the mother gets the Child Benefit which has important benefits for her.  The lower earning or non-earning parent should receive the payment, as that is better.

Advantages of receiving Child Benefit

In addition to the obvious cash advantage, anyone receiving Child Benefit will also receive full credit for National Insurance.

Taxpayers used to know this as Home Responsibility Payments but it is now more simply known as National Insurance Credits.

In essence, Child Benefit is the same as if you were earning a wage and paying National Insurance.  Although unlike wages, Child Benefit is tax-free on receipt.

Actually, that last paragraph is not strictly correct:

  • It is not taxable income, but
  • It can be clawed back, if your income exceeds £50,000

High Income Child Benefit charge

If either the person receiving Child Benefit, or their partner, receive taxable income in excess of £50,000 in the tax year then the amount paid is repayable at a rate of £1 for every £100 your taxable income exceeds £50,000.

Effectively a 1% tax charge capped at the amount of amount you (or your partner) received for the tax year.

The calculation is based on the highest income, irrespective of who receives the child benefit.

Disclaiming Child Benefit

One option that many adopt is to simply disclaim the Child Benefit.  This is simple, but it has the adverse effect of removing National Insurance credits from the lower earner.  This could have a very serious effect on their pension entitlement in later years.

In fact, there are actually three choices available to you:

  1. Receive the income and potentially pay the charge if you or your partner earn over £50,000
  2. Stop claiming, and lost the National Insurance credits
  3. Continue to claim, but not get paid any income

Clearly, the later is the best option as there  is no worry about tax bills, and no loss of the benefits.  However, you have to stop claiming the entire entitlement.

To opt for the third choice, you simply need to complete a simple online form or phone the tax office to have your status updated.

Income nearing £50,000?

If your income is nearing £50,000, then you can action some choices to keep your income below the limit.

The most common advice is to increase your pension contributions, or to opt for a salary sacrifice.  In our view these can cost you in the short term.  You are better to comprehensively plan for the effect of the charge.

This is the sort of pragmatic tax advice we give to our clients.  We always look at their tax situation in the round.  If you want to benefit from our services, contact Angus Nicolson today.

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