Child Benefit Charge

The receipt of Child Benefit can result in a tax bill. This potential bill brings the Child Benefit into the scope of self-assessment, and if you live in the Nottingham area, we at AHACCOUNTANTS can advise you on the potential application of the Child Benefit Charge and possible tax planning that may be appropriate to remove the charge.

The High Income Child Benefit charge applies to a taxpayer who has an income over £60,000 (for 2024/25, £50,000 for 2023/24) in a tax year where either they or their partner, if they have one, are in receipt of Child Benefit for the year.

Key Points of the Charge

The High Income Child Benefit charge is payable by a taxpayer who has ‘adjusted net income’ (explained later) in excess of £60,000, where either they or their partner is receiving Child Benefit. If there is a partner and both partners have adjusted net income over £60,000, the charge only applies to the partner with the higher income. Note that “partner” includes anyone you live with as if you were spouses or civil partners.

Practical Issues

Some couples with fluctuating income levels may find themselves caught by the charge or may find that the partner who usually has the highest income does not actually end up paying the charge. For example:

Example: Nicola, who receives Child Benefit, is employed as a teacher and earns £64,000 a year. Her husband, Alan, is a self-employed solicitor, and his accounting year-end is 31 March. He is late in submitting his books and records to his accountant for the year ending 31 March 2024. Nicola assumes that Alan will be liable for the charge since his profits generally exceed £70,000. However, when Alan’s accountant completes his tax return in January 2025, he advises that his profit has reduced to £48,000 due to bad debts. This means Nicola has the higher income for 2023/24 and is responsible for paying the charge by 31 January 2025, requiring her to contact HMRC.

For couples who do not share their financial details, determining tax liabilities can be complicated, especially when one partner earns over £50,000 and Child Benefit is being claimed.

Changes in Circumstances

The charge applies only to the weeks of the tax year for which the partnership exists. If a couple separates, the partner with the highest income will only be liable for the period from 6 April until the week they break up. Conversely, if a couple comes together and Child Benefit is already being paid, the partner with the highest income will only be liable from when they start living together until the end of the tax year.

What is Adjusted Net Income?

The rules revolve around ‘adjusted net income’, which is broadly defined as:

• Total income subject to income tax, less specified deductions (e.g., trading losses and payments made gross to pension schemes).
• Reduced by grossed-up Gift Aid donations to charity and personal pension contributions that have received tax relief at source.

Some individuals may wish to donate more to charity or make additional pension contributions to reduce or avoid the charge.

The Charge Rate

An income tax charge will apply at a rate of 1% of the full Child Benefit award for each £200 of income between £60,000 and £80,000. For taxpayers with income above £80,000, the charge equals the amount of Child Benefit paid.

Example for 2024/25: The Child Benefit for two children amounts to £2,213 per annum. If the taxpayer’s adjusted net income is £70,000, the income tax charge will be £1,107, calculated as £2,213 x 50% (i.e., £70,000 – £60,000 = £10,000/£200 x 1%).

Administration

Individuals must notify HMRC if they have a liability for income tax, capital gains tax (CGT), and the High Income Child Benefit Charge by 6 October following the tax year. The charge is also included in Pay As You Earn (PAYE) regulations to be collected through PAYE, potentially affecting payments on account and balancing payments.

Should You Continue to Claim Child Benefit?

It’s important to note that Child Benefit itself is not liable to tax. It can continue to be paid in full, even if you or your partner have a liability to the charge. However, claimants can elect not to receive the Child Benefit if they do not wish to pay the charge, which will not affect the credits available for state pension purposes for those who stay at home to look after children (provided an initial claim for Child Benefit was made at the child’s birth). This election can be revoked if circumstances change.

Do I Need to File a Tax Return?

If you or your partner have not filed a tax return before, you may need to do so. You must inform HMRC by 6 October following the end of the tax year if you think a charge may be due.

Guidance

HMRC has issued guidance on the charge and the options available, which should be essential reading for many families.