You may be aware that the Government have now finalised their intentions on restricting Child Benefit for higher earners. The announcement was made in the 2012 Budget with the intention of legislation being introduced this year, to take effect from January 2013. The headline details are as follows:
- The restriction will take effect from 7 January 2013.
- It will only affect you if there is one earner in your household earning in excess of £50,000.
- Child Benefit will be clawed back at a rate of 1% for every £100 of additional income, so an income of £52,000 will see a clawback of 20% of the Child Benefit.
HM Revenue and Customs (HMRC) have helpfully provided a summary factsheet together with questions and answers. We have a couple of additional questions and answers.
Q. To put some context on this, how much tax are we talking about?
A. Anyone currently earning over £50,000 will be paying tax at 40%. Child Benefit is dependent upon the number of children you have. The first child gives you Child Benefit of £20.30 p/w (= £1,055.60 p/a), whilst second and subsequent children give you Child Benefit of £13.40 p/w (= £696.80 p/a). A family with 3 children will therefore receive £2,449.20 p/a.
Therefore, if a higher earner’s income increases from £50,000 to £60,000, the following taxes will be payable on the additional £10,000:
- Income tax at 40% = £4,000
- Class 1 National Insurance @ 2% = £200
- Lost Child Benefit (for 3 children) = £2,449
Total taxes on £10,000 income = £6,649
Q. It sounds like Child Benefit is going to be paid out in one tax year and then repaid back to HMRC in the next tax year if it needs clawing back. Is that correct?
A. It looks like it. Question 11 on HMRC’s factsheet asks how the tax charge will be paid, the answer suggests that HMRC will send out a tax return in April 2013.
Q. What kind of individuals will this affect?
A. Employees. If you are self employed and earning in excess of £50,000, you should probably be trading through a limited company. If you are trading through a limited company, it is perfectly legitimate (and usual practice) to maintain income, through salary and dividends, at a level below the higher rate tax threshold, let alone £50,000. It is therefore quite feasible that the new tax charges will inevitably hit employees.
Q. OK, in that case, how many more tax returns are going to have to be introduced?
A. Just to emphasise how many people will be affected, the HMRC press release gives the following information:
The new tax charge in relation to Child Benefit will affect approximately 1.2 million families. Approximately 70 per cent of these households will lose all of their Child Benefit, and 30 per cent will only lose a portion.
That is quite a lot of people who will be asked to complete a tax return who don’t currently need to do so.
Q. And presumably the Higher Earner may also change too?
A. Correct. The income tax charge is determined by the earnings of the highest earner. In theory, this should be the same person each year, but it can fluctuate. In one year it could be the husband, the next year the wife, the year after back to the husband.
Q. Have the rules changed from the original proposals to take account of household income, rather than focussing on the Higher Earner?
A. No, your household will lose Child Benefit if one earner starts earning above £50,000, but you will not lose Child Benefit if you have a husband and wife both earning £49,000.
Q. If I’m an employee, can I avoid losing Child Benefit?
A. It looks like you can. The income figure which HMRC is going to use to see whether Child Benefit is subject to the tax charge is Adjusted Net Income. HMRC provide an explanation as to how this is calculated:
Adjusted net income is calculated in a series of steps. The starting point is “net income” which is the total of the individual’s income subject to income tax less specified deductions, the most important of which are trading losses and payments made gross to pension schemes. This net income is then reduced by the grossed-up amount of the individual’s gift contributions and the grossed-up amount of the individual’s pension contributions which have received tax relief at source. The final step is to add back any relief for payments to trade unions or police organisations deducted in arriving at the individual’s net income. The result is the individual’s adjusted net income.
Therefore, anyone earning more than £50,000 can reduce their adjusted net income by making charitable donations or contributions to their personal pension. The more children, the bigger the saving!
Hopefully this article will explain how the changes to Child Benefit will operate, and how they may affect you. It should also highlight the need to think about your affairs if you are in a position to be able to do so, and the importance of being proactive.