Families urged ‘be on guard’ for child benefit tax

Hundreds of thousands of families are due to receive letters from HM Revenue & Customs (HMRC) in the coming weeks, spelling out how their child benefit could be cut.

From 7 January 2013, families claiming child benefit will have to pay a new tax charge where one partner earns more than £50,000 a year.

According to HMRC, the tax charge will affect approximately 1.2 million families, with around 70 per cent losing all their child benefit and 30 per cent losing a portion. The average loss for those that lose will be roughly £1,300 per year.

Wendy Alcock, campaigns co-ordinator from website www.moneysavingexpert.com warned: “We’ve not seen changes to the child benefit system since it was introduced in the 1970s, so families affected are going to need to be on their guard.”

Under the new rules, partners are defined as:

  • married couples or civil partners living together
  • a man and a woman who are not married to each other but are living together
  • a man living with a man or a woman living with a woman as if they were civil partners.

The charge will reduce child benefit by one per cent for every £100 of income between £50,000 and £60,000. If both partners have ‘adjusted net income’ over £50,000, the partner with the higher income is liable for the charge. Taxpayers with income above £60,000 will see all their child benefit wiped out.

HMRC gives the example of a taxpayer with an income of £54,000, and two children. Child benefit for two children is £1,752, so the taxpayer will pay a charge of £700.80 – i.e. £17.52 for every £100 earned above £50,000.

Adjusted net income is calculated as the individual’s total income from employment and/or self-employment, as well as from pensions, property, savings and dividends, minus specified deductions, such as gross pension contributions, trading losses and gross Gift Aid.

All taxpayers affected by the charge will need to declare their liability through self assessment tax returns, including what HMRC estimates to be 500,000 taxpayers who do not currently complete such a return.

People affected will need to be prepared to file a paper return, due in October 2013, or an online return in January 2014, or risk fines and other financial penalties.

Although experts say there are options that could enable parents to retain child benefit – including pension contributions – they also need to consider the implications for their overall financial picture and long-term consequences.

Link: HMRC guidance on child benefit income tax charge