Changes to child benefit rules affecting households where at least one partner earns between £50,000 and £60,000 have now come into force.
From 7 January 2013, eligible families where at least one parent falls into the above income bracket will lose one per cent of their child benefit for every £100 earned over £50,000. The loss will be collected via a new tax charge which will be payable by the person on the highest income, if both partners are earning.
Under the new system, once an individual’s income is greater than £60,000, then they will effectively lose all of their child benefit entitlement as the tax charge will be 100 per cent. If an individual and their partner individually receive an adjusted net income of less than £50,000, then the child benefit is not taxable.
With careful planning, it may be possible to reduce your net income to below £50,000 through paying pension contributions, gift aid donations or taking a smaller dividend from your own company in the current tax year, as long as those strategies continue until your children are no longer eligible for child benefit.
The person who is liable to pay the income tax on the child benefit will be responsible for notifying HM Revenue & Customs (HMRC) of their chargeability. As such, employees who are entitled to child benefit with an income of £50,000 or more must notify HMRC to avoid penalties.”
Claimants can choose not to receive child benefit if they or their partner do not wish to pay the new income tax charge. This can be done by making a one-off permanent disclaimer of child benefit to HMRC and the disclaimer election must be made by the person who is entitled to receive the child benefit. However, once the child benefit is revoked, this National Insurance Contributions (NIC) credit cannot be retained and future state pension entitlement may be jeopardised. The solution is to continue claiming child benefit but elect not to receive it. This means that no tax would be payable on the benefit but the claimant would still receive the NIC credits needed to qualify for a state pension.
For further information on how the changes could affect you, please contact us.