In this post, Martin Howe outlines the High Income Child Benefit Charge (HICBC), what it means, where it applies and what you can do if you are impacted by the charge.
Since a change in legislation, effective from January 2013, introduced the High Income Child Benefit Charge (HICBC), HMRC has clawed back some or all of the Child Benefit entitlement from parents earning £50,000 a year or more, HMRC sending 73,000 letters to affected parents last tax-year and these rules apply in any case where Child Benefit is claimed, regardless of the relationship between the child and the adult.
Taxable earnings for this purpose include savings or dividend income, income from property, car allowances, employer-provided health benefits etc. Income from ISAs is not assessable against High Income Child Benefit Charge.
From 6 April 2021 liability to Higher Rate Income Tax will start on earnings from £50,270 this means that for the first time some Basic Rate Income Tax Payers will face the charge.
The HICBC is calculated on a sliding scale affecting parents with individual, not combined, incomes of between £50,000 to £60,000 per year at 1% of every £100 in taxable income in excess of £50,000.
For example, a parent earning £55,000 must repay half of the Child Benefit they have received or would otherwise have received. Parents earning £60,000 per year or more lose their full entitlement to Child Benefit. HMRC provide a Child Benefit tax calculator at www.gov.uk/child-benefit-tax-calculator
This charge is controversial as potentially a couple could earn a joint annual income of £100,000 and would remain entitled to receive full Child Benefit, whereas a couple where one parent earns £60,000 a year and the other has no income, so a joint income of £40,000 less than my previous example, would be liable to a charge from HMRC equal to the amount of Child Benefit received, so effectively clawing back the full amount.
An interesting anomaly exists in that it is the high-earning parent who is liable to HICBC and not necessarily the parent in receipt of the Child Benefit who must make the repayment. This means that potentially one parent is fully entitled to claim the money whilst the other must legally pay the charge to HMRC! Equally, HMRC is unsympathetic where couples do not share income details with each other and it can be problematic for those with fluctuating incomes.
Over these past few years, I am aware of several families where after receiving a one-off lump sum, for example, a bonus or a redundancy payment, they have unwittingly fallen foul of these rules. This has resulted in an unwelcome tax bill, in some cases, received several years later. Where a repayment is necessary, HMRC’s expectation is that this is made via self-assessment in full within four months and you may also have to pay an additional ‘failure to notify’ penalty on top of the payment owed to HMRC.
Couples are still eligible to claim Child Benefit even where the high-income charge would mean it would effectively need to be fully repaid.
The onus is on the parents to opt-out of receiving Child Benefit or HMRC will continue to make the payments, regardless that they may already be aware that one or both parent’s incomes exceed the thresholds.
Child Benefit remains to be a very welcome income boost to parents. At £21.05 per week for the eldest child and with every additional child are entitled to an additional £13.95 per week (2020/21 tax year a family of two children are entitled to Child Benefit of £35 per week received up until the child is age 16 or up to 20 if they stay in approved training or education. A family of three children would receive £48.95 per week, £2,545.40 per year.
A Higher Rate taxpayer needs to earn an additional £81.58 per week (£4,242 per annum) to receive the equivalent of £48.95 per week after allowing for Higher Rate Income Tax.
A Higher Rate taxpayer with three children losing full entitlement to tax benefit is an effective marginal tax rate of 65.45% as between £50,000 and £60,000 per annum not only is £10,000 of income liable to 40% Income Tax but effectively £2,545.40 is also being lost, so total tax on this £10,000 slice of income is effectively a total of £6,545.40 (£4,000 plus £2,545.40).
It is important that a parent with a child aged under 12 at least registers their entitlement to Child Benefit in order to receive National Insurance credits which would potentially otherwise be lost for a low or non-earning parent. Where grandparents provide child care they may also be entitled to claim Specified Adult Childcare Credits.
When dealing with parent’s impacted by HICBC, as a financial planner I make clients aware of the potential advantages of making additional company or personal pension contributions which in some cases may recover their entitlement to Child Benefit and at the same time reap valuable tax benefits in two different ways:
- For example, if a Higher Rate taxpayer earning £60,000 per annum were to make a net personal pension contribution of £8,000 this would be grossed up to £10,000 which would then be deducted from what HMRC term as ‘adjusted net income’. In this example, it would lower the individual’s taxable income to £50,000 (£60,000 – £10,000) which would reinstate full entitlement to Child Benefit.
- The Higher Rate taxpayer can then reclaim a further 20% tax relief on their pension contribution which effectively mean a £10,000 gross personal pension contribution comes at a net cost of £6,000 after a total of 40% tax relief has been recovered. This pension contribution of £10,000 gross has attracted £4,000 tax relief and also recouped entitlement to £48.95 per week Child Benefit which is tax-free and as shown earlier, is the equivalent of earning an additional £4,242 per annum gross of Income Tax to a Higher Rate Tax Payer in the current tax year.
In this example, the additional gross pension contribution of £10,000 has only cost £3,454.60 after-tax savings of £6,545.40 (£4,000 pension tax-relief and £2,545.40 recovered Child Benefit). This general principle of making pension contributions to potentially receive tax relief and recover entitlement to Child Benefit applies equally to both personal and company pensions.
So, the benefits are twofold! Taking this step could mean parents still receiving their full entitlement to Child Benefit whilst at the same time boosting their future retirement when their children have grown and flown the nest!
This information is based on our current understanding of the relevant legislation and regulations which are subject to change. Three Counties are not tax advisers. Restrictions may apply in certain circumstances as to the maximum pension contributions allowed which are dependent on individual circumstances. Three Counties Advisers would welcome the opportunity for a no-obligation conversation to assist you and your family.
If you wish to discuss the contents of this blog post please contact email@example.com or telephone the office on 0191 230 3034.
Disclaimer: The above content does not constitute financial advice. Your circumstances may differ from those outlined and you should seek advice which is relevant to your own situation.