Tim Palmer examines the fiscal impact of the high-income child benefit charge on parents who receive child benefit.
An income tax charge could apply to a taxpayer who is entitled to child benefit (or has a partner who is entitled to child benefit). You have to look at the income of each partner separately. The child benefit is taxed on the partner with the highest income.
The scenarios could be as follows:
-
Both husband and wife individually each have income of less than £50,000. Neither will be taxed on the child benefit.
-
The wife has income of £20,000 and the husband has income of £75,000. The husband will be taxed on the child benefit. The tax will be the amount of the child benefit itself.
-
The wife’s income is £58,918 and the husband’s income is £40,000. The wife will be taxed on the child benefit. When a partner has income between £50,000 and £60,000, the charge will be equal to 1% of the amount of the child benefit for every £100 of net adjusted income exceeding £50,000.
She has one child and the child benefit she receives is £1,134. The child benefit taper will be calculated as follows:
Net adjusted income - £50,000 x %
£100
The percentage is rounded down to the next whole number. The wife’s tax liability will be: £58,918 - £50,000 = £8,918.
£8,918/100 = 89.18% rounded down to 89%.
Hence, she will pay income tax on the child benefit of £1,134 @ 89% = £1,009.
The net adjusted income for the purposes of calculating the high-income child benefit charge is after deducting losses and the gross amount of any gift aid payments or personal pension contributions but before the deduction of the income tax personal allowance.
Partners are a married couple, or those in a civil partnership, and a couple who are not married or in a civil partnership but are living together as if they were so.
The high-income child benefit charge can be avoided if the person entitled to the child benefit makes an election not to receive it.
Example
An accountant goes to the home of a married couple who are new clients.
He speaks to the wife first. She confirms that she receives child benefit of £1,134 per annum for her first child and £750 for her second child. She does not work, as her two children are very young. She has modest savings income of approximately £2,000 per annum. She will not be taxed on the child benefit because her income is less than £50,000.
The accountant next interviews the husband. He is a stockbroker in the city, with an annual salary of £150,000.
He will be charged income tax on the child benefit because his income exceeds £50,000. His tax on the child benefit will be £1,884, i.e., the child benefit itself. His wife will continue to receive the child benefit, and he will declare it and put it on his own SA tax return as the highest earner of the couple, and because his income exceeds £50,000.
He is going to pay the tax on the child benefit. This is to ensure that, because his wife currently is not working, by registering for child benefit, she can gain the National Insurance credits that come automatically when she registers for child benefit. If she does not, she could end up with a lower state pension in retirement. She needs 35 years’ worth of NI contributions in order to qualify for the full amount.
Practical tip
Accountants and tax advisers must liaise with their clients who receive child benefit. The tax position must be explained, and the appropriate decisions taken.
