Tax Returns & child benefit claims – the basics

If you or your partner are claiming child benefit and one or both of you are earning more than £50,000 per year you will have to complete a Tax Return..

Overview..

Here, we explain who is affected by the child benefit changes and what, if anything, you need to do.

What is happening to child benefit?

Under current rules, all parents and guardians receive child benefit of £20.30 a week for the first child and £13.40 for each child after that. This amounts to £1,752 a year for families with two children.

But from January 2013, households where at least one person earns more than £50,000 will have their child benefit means-tested, so depending on their income, it will either be stopped or clawed back through extra tax payments.

The benefit will be lost entirely for those earning £60,000 or more, while families where one parent earns between £50,000 and £60,000 will see their benefit reduced on a sliding scale, so that 1% of the benefit is lost for every £100 above £50,000 that they earn.

Only the highest earner in a household has their income taken into account when deciding whether child benefit is due to the family.

Changes to the rules have prompted much controversy, mainly due to the fact that two parents each earning £49,000 will still continue to receive child benefit in full – even though their combined salary is much higher than households where one earner has an income of £60,000.

Some experts claim the cuts could in fact be illegal under EU law because they discriminate against British workers whose benefits are easier to claw back than those of other EU citizens working here. HM Revenue & Customs has dismissed these claims.

Do the thresholds relate to my gross salary?

No, importantly the £50,000 and £60,000 thresholds relate to your ‘adjusted net income’, rather than gross salary.

For example, your pension contributions are taken off your pay before your ‘adjusted net income’ is arrived at. That means if you’re earning £52,000, but make pension contributions of £250 a month (£3,000 a year), you shouldn’t receive a letter because this brings your income to below £50,000.

Other ways to reduce your adjusted net income, and remain eligible for child benefit, include using what is known as ‘salary sacrifice’, whereby you use some of your salary to buy childcare vouchers, medical insurance or to lease a car.

What happens if I am eligible for reduced child benefit or am due to lose it?

People earning between £50,000 and £60,000 will have to fill in a self-assessment tax return and any child benefit they are no longer entitled to will be clawed back through the tax system. You will never pay more tax than the benefit received.

The changes means that half a million people who have never filled in self-assessment forms before will now have to do so if they want to continue to receive child benefit.

Those earning £60,000 or more can choose either to give it up completely, in which case they won’t have to worry about filling out a tax return unless they normally complete one, or they can continue to take the benefit over the year, fill in a tax return and have it taken back then.

If you missed the opt-out deadline of 6 January, you can still opt out, but you will have to complete a self-assessment tax return for the 2012/13 tax year. This must be submitted 31 January 2014 and you will be required to repay the Child Benefit you receive between now and April.

If you opt out before 5 April, which is when the current tax year ends, you shouldn’t have to fill out a tax return for the 2013/14 tax year, provided your payments stop before the beginning of the new tax year.

Claiming child benefit can help you build up national insurance credits, which in turn can help protect your future state pension. However, according to HMRC, if you have chosen to stop getting the benefit, you will still continue to accrue these credits.

If you have another child in the future, and your income is over £50,000 it is important that you complete a child benefit form even if you decide not to receive any payment. This will protect your entitlement to other benefits such as Guardian’s Allowance, and ensure your child is automatically issued with a National Insurance number before their 16th birthday.

Will I get a letter about changes to child benefit if I’m self-employed?

No, only people in the Pay As You Earn (PAYE) system who earn more than £50,000 are being sent letters about changes to child benefit – not those who are self-employed or a partner in their own business.

It is your responsibility to pay the extra tax, even if you don’t hear from HMRC, so you will need to let them know whether you want payments stopped or you if you want them to continue and pay extra tax.

What happens if my income fluctuates or falls in the future?

Families which expect one parent to earn more than £60,000, and so do not claim child benefit, but then subsequently have a fall in income, will now be able to claim the benefit retrospectively.

If there is any doubt about how much income you will receive, you should continue to claim child benefit. If during the course of the year your income exceeds the threshold, payments can be clawed back at a later stage via the self-assessment system.

What if I am separated or divorced?

If your ex-partner earns more than £50,000 but you receive child benefit for your children and you earn less than this amount, you will be allowed to keep the payments in full.

The Basics

Child Benefit and tax if you have a high income

What is changing in January 2013?

Child Benefit will still continue to be paid to everyone, but if you’re a higher-income family, you’ll have to pay extra tax if you choose to keep getting it. The extra tax you pay will effectively cancel out some or all of your Child Benefit.

You’ll start to pay more tax if either you or your partner have an income over £50,000 a year depending on how much income you’ve got, but you’ll still continue to receive the same amount of Child Benefit. If your income is over £60,000 a year, you’ll pay so much more in tax that it will cancel out all of the Child benefit you get.

It’s the income of each partner in the household that counts. Your combined income won’t be taken into account, This means that if one of you has an income of over £50,000, you’ll be affected by the changes, even if the other partner doesn’t have any income at all.

However, if both you and your partner have an income just below the £50,000 limit, you’ll still continue to receive the full amount of Child Benefit and won’t have to pay any extra tax. If both and your partner have an income over £50,000, whoever has the higher income will have to pay the extra tax.

Your income will generally be your income before tax and deduction of ”Personal Allowance’. It includes everything you pay tax on, such as your wages or profits from self-employment, savings interest or rental income. It doesn’t include some deductions, such as certain pension contributions or Gift Aid donations to charities. This is called ‘adjusted net income’.

How is the extra tax calculated?

If you have an income of between £50,000 and £60,000 a year, the amount of extra tax you’ll have to pay will be 1 per cent of the amount of Child Benefit you get for every £100 of your income above £50,000. If your income is more than £60,000, the amount of extra tax you’ll have to pay will be the same as the amount of Child Benefit your household gets.

Example

Anna and Bill are a couple with two children aged 14 and 16. Bill earns £54,000 a year. They get £1,752.40 Child Benefit a year. (£20.30 for the eldest child plus £13.40 for the second child = £33.70 x 52 = £1,752.40)

As Bill earns £4,000 over the £50,000 threshold, his extra tax will be equivalent to 40% of the total Child Benefit they get. (£54,000- £50,000 = 4,000 divided by 100 = 40%).

This means that while they will continue to get Child Benefit of £1,752, Bill will have to pay extra tax of £700 for that tax year. This is 40% of £1,752.

Can you choose not to get Child Benefit so you don’t have to pay the extra tax?

You can choose not to receive any Child Benefit, if you don’t want to pay the extra tax. However, HMRC is encouraging you to still fill out a Child Benefit claim form even if you choose not to actually receive any Child Benefit payments from them. This is because filling your claim form for Child Benefit can help you build up national insurance credits which can help protect your future state pension. This is particularly important if you’ve stopped work to look after children full time. It can also help protect your entitlement to other benefits such as Guardian’s Allowance, and ensure your child is automatically issued with a National Insurance number before their 16th birthday.

Completing a Child Benefit claim form will make it easier for payments to start again if your circumstances change and your income falls below the £50,000 limit. For example because one of you loses your job or your relationship breaks down.

How will you pay the extra tax?

If you decide to continue getting Child Benefit, you’ll have to fill in a self-assessment tax return. If HMRC is aware you are likely to be affected, they will send you a tax return during April 2013. This is when you’ll have to declare you were getting Child Benefit and pay the extra tax, known as the High Income Child Benefit Charge.

You’ll have to register for self-assessment if you are not already registered.

You can choose to pay the tax charge either:

  • as a lump sum through self-assessment or
  • through your tax code under pay as you earn  (PAYE). However, even if you choose to pay the tax charge in instalments through PAYE, you’ll still have to complete a self-assessment tax return.

You can find more information about how to pay the charge on the HMRC website at www.hmrc.gov.uk.

It is your responsibility to pay the extra tax, even if you don’t hear from HMRC.

Can you continue to get Child Benefit but not pay the extra tax?

You may be able to avoid having to pay the extra tax and still receive Child Benefit, by reducing your taxable income. For example, you could do this by paying more into your pension. Pension contributions are taken out of your income before you pay tax. This could therefore reduce the amount of income on which you have to pay tax to below the £50,000 limit.

You could also consider using salary sacrifice and opt to have some of your pay paid in the form of childcare vouchers. Childcare vouchers are also taken out of your income before you pay tax, so your taxable income will also reduce.

If you’re thinking of doing this, it’s always a good idea to get independent financial advice to fully consider your options before you make a decision.

Questions and Answers

Q. Who exactly is going to lose the child benefit?

Under the previous plans, parents earning more than £42,475 a year each – the 40% tax rate threshold – were set to lose their payments from January 2013.

The new plans allow a family to get the full allowance as long as neither parent earns more than £50,000 a year.

And here’s the crux: combined or household income is irrelevant. If just one parent earns over £50,000 a year, they get less.

Households where at least one parent earns between £50,000 and £60,000 a year will effectively get a partial payout.

Over £60,000, they’ll effectively get no child benefit.

Q. How will HMRC take child benefit away, will I just stop receiving it?

No. Everyone will still be eligible but what happens next is complex.

Families where one parent earns over £50,000 still get the full benefit but will pay more tax to effectively reduce or cancel out the gain.

They will have to declare this on a self-assessment tax form.

HMRC estimates that of the 1.2 million of families affected, 500,000 will have to fill out a self-assessment form who currently don’t have to.

Q. What if I earn over £50,000 but my partner nothing?

Sadly, the result creates an anomaly whereby a family can earn £100,000 a year between them (£50,000 each) and get the full benefit.

But if one parent earns £60,001 and the other doesn’t work, they’ll effectively get no child benefit.

It’s all about if one parent hits the threshold. Household income is irrelevant.

Q. How much child benefit do I get?

The weekly amounts, fixed for at least the next two years, are:

  • £20.30 (£1,056 a year) for the oldest or only child.
  • £13.40 (£697) for each additional child.
  • £14.75 (£767) as a per child guardian’s allowance.

Q. What if I earn between £50,000 and £60,000? What exactly happens?

If at least one parent in your family earns in that bracket they will still get the full child benefit.

However, they will pay extra income tax to reduce the gain.

This will be charged at 1% of the total child benefit per extra £100 they earn over £50,000 a year.

This will be based on the salary of the highest earner of the two.

The table below highlights how much child benefit a family with two kids will get, after tax.

Child    benefit from Jan 2013

Highest earner salary

Annual child benefit after tax

£40,000

£1,752

£50,000

£1,752

£55,000

£876

£60,000

£0

Based on family with two kids

Q. What counts as income?

This includes everything you’d normally have to declare for tax purposes, and is based on actual income, not estimated income.

This includes, but is not limited to:

  • Your salary
  • Any second job
  • Savings interest
  • Rental income

Q. For what period do I have to declare income?

The income that counts is what you earn in the tax year for which you claim child benefit.

Q. What if income is irregular?

What is important is not when in the year you earn money but how much you earn per financial year. So only the total matters.

Q. What if I earn over £50,000? Which parent is taxed extra?

If both earn over £50,000, the partner with the highest income will be liable to the charge. If just one earns over £50,000 they will have to pay the extra tax.

Q. What if I earn over £50,000? When do I pay this extra tax?

The new regime is an ‘earn now, pay later’ system. If you collect child benefit in the 2012/13 tax year when the change happens, you must declare your 2012/13 income by 31 January 2014, at which point the tax will be due.

HMRC says those in the PAYE system may have the option to pay the tax as part of their standard pay packet tax deduction, but this detail has yet to be confirmed.

Q. So if I earn over £50,000, what do I do?

For taxpayers in the PAYE system, you will have to fill out a self assessment form for the period in which you’ve claimed child benefit.

HMRC will write to you in the autumn to explain exactly what you need to do next.

If you already fill out a self assessment form, you will need to include the information relating to child benefit in your tax returns for 2012/13 and beyond, and will be charged as part of your overall tax bill.

Q. What if I earn over £60,000? What are my options?

You can choose not to take child benefit to avoid the complication of additional tax.

But you can also choose to take it, though the extra tax will wipe out the entire payout.

HMRC stresses it is still important to complete claims for any new children, even if parents don’t actually get any child benefit.

For each week you are entitled to the cash, you could qualify for National Insurance credits which can help to protect future entitlement to the state pension.

Q. What counts as ‘living together’ to determine income?

HMRC includes any two adults who live together, whether they are married or not.

Q. How will HMRC monitor if people live together?

This information is unclear at present.

Q. What if I am separated from the other parent? Does a step-parent’s income count?

As only one parent can claim child benefit, HMRC will assess all earners within the household within which the benefit is claimed.

If that household includes a step-parent or someone who is not the child’s parent, their income still counts.

Q. What if the child is in custody at two places?

Again, HMRC will assess all earners within the household within which the benefit is claimed.

Separated parents may decide to change who claims child benefit to side-step the tax.

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