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Child Benefit Tax Charge – now it is here, what can you do?

In case you didn’t know or catch our article at the beginning of 2013, the child benefit tax charge came into effect on the 7th January 2013, impacting over one million families.

Here we look at the implications of this and what if anything you can do to mitigate this.

Firstly, what are the current rates of child benefit?

The current weekly rates of benefit are £20.30 for the first child, and £13.40 for each subsequent child. These rates will remain unchanged in 2013/14.

Benefit can be claimed for all children under the age of 16. Once a child reaches this age, it may still be possible to claim benefit until their 20th birthday e.g. they remain in full time ‘non-advanced’ education.

So as an example of the potential financial impact of the child benefit tax charge, a family with 2 children could see their annual spendable income drop by up to £1,752 p.a. in 2013/14; those with 3 children could lose £2,449 pa.

How will you be affected and what options do you have?

To start with, let’s revisit the implications of the tax charge.

Unless you have already ‘opted out’, benefit payments will continue to be paid in full to the claimant, but will be clawed back by way of a tax charge on the household’s highest earner if their personal taxable income exceeds £50,000 per tax year.

What is taxable income?

The income figure used to test against the £50,000 threshold is the same one used to assess entitlement to the personal allowance and the age related element of personal allowance – ‘adjusted net income’ (ANI).

The calculation is:

The SUM of:
Taxable income from employment, including any company benefits; and
Taxable profits from self employment; and
Interest, dividends and rental income received; and
Any pensions received and taxable social security benefits.

Pension contributions; and
Trading losses; and
Grossed-up amount of gift aid payments (grossed-up by basic rate tax).

What does this mean for you if you haven’t opted out?

Once taxable income exceeds £60,000 in a tax year, the charge will be 100% of the benefit claimed i.e. the value of the benefit is wiped out.

For incomes between £50,000 and £60,000, the tax charge is 1% for every £100 income exceeds the £50,000 threshold. These people will be better off overall as the tax charge will always be less than the benefit claimed.

For the 2012/13 tax year, the tax charge will never exceed 25% of the yearly benefit claimed as the tax charge will only have been operational for one quarter of the current tax year. So, the tax will be limited to £438 where benefit is being claimed for 2 children; £612 for 3 children.

Around 500,000 people will need to complete a tax return for the first time. The tax charge will be collected under self assessment, so the first return will need to be in by 31 January 2014 for those submitting on line – unless this is done correctly and on time, this could also result in fines and late payment penalties.

So what action can you take?

The advice will depend on your personal circumstances and as ever, a chat with your McLintocks Partner is the first step but possibilities could include:

  • Make an individual pension contribution to reduce income to below £50,000. This would wipe out the child benefit tax charge altogether. And higher rate tax relief would also be available on the contribution if it all falls in the higher rate band.
  • If you cannot afford to make a contribution that reduces income to the £50,000 threshold, then any contribution reducing income to a level between £50,000 and £60,000 will still result in a surplus of child benefit over the tax charge.
  • A pension contribution by salary sacrifice is an alternative way of reducing taxable income. With the agreement of their employer, an employee can reduce their contractual income in return for an equivalent employer payment to their pension. In addition to the tax savings above, the employee will also save NI at 2% for payments over the upper earnings limit. And the contribution itself can be increased if the employer agrees to pass their 13.8% NI saving on to the pension.
  • Payments to charity under gift aid reduce taxable income in a similar way to an individual pension contribution.
  • If the person being assessed to the tax charge is also the holder of income bearing investments, consider transferring these to their lower earning partner. As the gross value of savings income is included in taxable income, this simple solution could make a difference.
  • Do nothing. Continue to claim the benefit and pay the tax. This is more likely to be a consideration for those families where the higher earner has adjusted net income between £50,000 and £60,000, when the benefit will still exceed the tax charge. They may not be able to afford to see their net spendable income fall further by making a pension contribution.
  • Where the high earner has taxable income in excess of £60,000, some families may conclude that it is not worth making a claim for child benefit in the first place. After all, they will not be any better off financially. But there is still an incentive for some. Assume that one parent stays at home to look after the children and does not work. As they will not be paying national insurance, they will not be building up any entitlement to state pensions but by claiming benefit for a child under the age of 12, they will receive NI credits which will protect their entitlement.

The Next Step?

This tax charge is seen as unfair by many and overly complex………but it is with us now and your McLintocks Partner is available to chat through it with you and see what are the best options to take for you and your family.