Child benefit is a helping hand from HMRC for many families. The tax free payment is often used by parents to top up their income but for some who are deemed high earners HMRC will actually claw back that payment in the form of a high income child benefit charge. In this article we will first look at what child benefit is and then how and when the high income child benefit charge is applied.
What Is Child Benefit?
If you are responsible for bringing up a child then you may well be able to claim child benefit providing the child you look after is either:
- Under 16
- Under 20 and in approved education or training
If approved a payment is made every 4 weeks which is equivalent to £21.05 per week for the eldest child and £13.95 for every additional child. There is no limit to how many children you can claim for providing you meet the qualifying criteria but each child can only be claimed for once. This means that where a child splits their time between 2 households only one household can claim the benefit. This benefit is also often available if you adopt, foster or look after some else’s child and in some circumstances even when you move abroad. HMRC have detailed guidance for these circumstances. To make a new claim you can fill out child benefit claim form CH2 and send it to the child benefit office.
High Income Child Benefit Charge
When an individual has adjusted net income of more than £50,000 they may be subject to the high income child benefit tax charge which is HMRC’s way of clawing back the benefit from high earners. For couples who both have income in excess of £50,000 the charge will be applied to the highest earner. Even if you personally are not claiming the benefit you can still be liable for the charge if your partner claims or where someone else does and contributes at least half of a child’s upkeep who lives with you.
For every £100 of adjusted net income over £50,000, a 1% charge is applied to the amount of benefit received. So once adjusted net income reaches £60,000 the charge will equal the full benefit received. Of course the charge is capped at 100% of the child benefit received.
Your adjusted net income is your total taxable income from all sources less any reliefs such as gift aid or pension contributions.
Example
Mr Jones earns a salary of £50,000 from his employment. He also receives taxable benefits to the value of a further £5,000 and contributed £2,000 to a pension scheme (without tax relief).
Mr Jones’ adjusted net income is £53,000 (50,000+5,000-2,000). Note that the pension contribution does not need to be “grossed up” because no tax relief was applied in the first place. Where the pension provider is applying basic rate tax relief to the pension contributions you will need to gross them up.
In the example above Mr Jones is exceeding the limit by £3,000. This means that 30% (3000/100) of the benefit received will be now be charged back.
National Insurance Credits
Although the thought of the extra income is the reason most claims are made, HMRC also recommend claiming because:
- By claiming you can get national insurance credits which count towards the state pension
- By claiming your child will automatically get a national insurance number when they reach 16 years old
As these benefit payments can help you gain credits towards the state pension. spouses should think carefully about who makes the claim. Of course if there is a high income charge to be applied this will be determined by income levels but it makes sense for any individual on low or no income to make the claim rather than the higher earner. If you have not taken advantage of this setup then don’t panic, it’s not too late. If the higher earning spouse has been claiming they can still transfer the credits to their lower earning spouse.
How Is The Charge Applied?
If you know that you will need to pay the high income child benefit tax charge then it is your responsibility to inform HMRC and failure to do so will usually lead to penalties being issued. You will have to inform HMRC by registering for self assessment and completing the relevant sections of the tax return which will include informing them of all other income sources. The deadline to register is the 5th October following the end of the tax year that the charge will apply to. The self assessment tax return will then be due by the 31 January that follows.
Example:
5 April 2020 (tax year ends and the individual determines they must pay the charge)
5 October 2020 (deadline to register for self assessment)
31 January 2021 (self assessment return must be filed and liability paid)
For more information on why and when you might need to register for self assessment check out our article do you need to complete and register for self assessment.
Do I Have To Claim Child Benefit?
Of course there will be some individuals who know their income will exceed £60,000 year after year which means any benefit received will end up being withdrawn via the high income child benefit charge anyway. Having to pay the charge also creates the need to submit a self assessment which might not have otherwise been required. Therefore an individual can opt not to receive the child benefit but HMRC recommend that they still complete the child benefit claim form and simply state on the form that they do not want to receive the payment. By doing this they will still enjoy the national insurance benefits detailed above such as state pension credits and the automatic issuing of a national insurance number for the child when they reach the age of 16.
If you are already claiming child benefit then you can stop this by completing the online form or contacting the child benefit office by post or phone. Once you have stopped the benefit payment you will still be responsible for paying any high income child benefit tax charges relating to previous years and will also need to inform the child benefit office of any changes to your personal situation that may affect your entitlement to child benefit. The latter is particularly important as although you won’t be receiving the payments you may still be benefiting from the national insurance credits.
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Adam Hill
Practice based accountant with over 10 years experience, specialising in SME's, Freelancers and Personal Tax. "I take pride in proactively recognising tax planning opportunities on behalf of clients to help them operate more efficiently."
