Child Benefit shakeup may be taxing for your family

Millions of households will receive letters from HMRC over the next few days about changes in Child Benefit which could affect tax codes, according to leading accountants and business advisers PKF.

From January 7th, 2013, an element of means testing will apply to Child Benefit administered by HMRC – and PKF’s Norwich-based Director of Tax Andrew Robinson warned that some families could be hit hard by the changes.

“There are doubts about the fairness of the system and the risk of some conflict where the person entitled to Child Benefit will have to ask a partner details of their income,” he said. “It seems to completely ignore the concept of independence and confidentiality on incomes. Questions have even been raised on whether it impinges on human rights.”

The HMRC letters will go out to all claimants who might be impacted by the law changes – although Child Benefit will remain distinct from the child and working tax credits (and the universal credit when this is eventually introduced).

Claimants will be asked if they wish to opt out of receiving the benefit. HMRC will also have to warn those who maintain their current claim that the benefit will start to be clawed back through claimant’s tax codes or tax assessments where annual income exceeds £50,000. The clawback will be at 1% of the benefit for every £100 of income over £50,000, so that when income reaches £60,000, the financial benefit of the claim is lost.

Andrew explained: “For many couples where the £60,000 earnings threshold is expected to be exceeded by one person, it is likely to prove simpler to opt out of receiving Child Benefit initially rather than risk errors arising through a tax code adjustment. But even here there can be complications with National Insurance issues to consider for those who give up work to look after children.

Controversially, the clawback rules apply to the claimant’s partner (spouse, civil partner or cohabitee) as well as the claimant. For example, if a person claims Child Benefit and has an annual income of £25,000 but the person’s partner has income of £65,000, the benefit will be paid direct to the claimant’s bank account as now, but clawed back from the partner via the tax code applied to his or her salary (the clawback charge will always fall on the higher earner).

This new high income child benefit charge will be collected by HMRC through PAYE adjustments in 2013/14 or through the tax return of the higher earner of an affected couple. However, if both partners can reduce their taxable income for the current year to less than £50,000, they will get to keep the full value of their child benefit.

“There may be a number of options for reducing taxable income to make the anomalies in the rules work in your favour,” said Andrew. These include making pension contributions, using a salary sacrifice arrangement if offered by your employer, transferring income producing assets and even getting your parents to make pension contributions on your behalf. But it is important to take special advice to make sure your plans are cost-efficient.

“In other cases, where incomes are variable or fall into the £50,000 to £60,000 band, where domestic partnerships end or new partnerships are created, there are bound to be difficulties and under or overpayments may well arise. Here the best option will probably be to claim the payments but report any income fluctuations or changes to HMRC as soon as they arise (as with the tax credits system, it is up to you to report any changes).

“The Government has sought to resolve the longstanding problem that parents who give up work to look after children create a gap in their National Insurance contributions record and miss out on a full state pension on retirement.

“Now, a parent who stays at home to look after a child under the age of 12, and who registers for child benefit, will qualify for Class 3 National Insurance credits to maintain his or her contributions record.

“Fortunately, those who register for Child Benefit can also now elect for benefit payments not to be made, and thus can avoid the need for claw back from a spouse or partner earning over £50,000.

Andrew concluded: “Clearly these changes will have an adverse impact upon some households with lower incomes than others due to the anomaly of the income threshold. You may find a household with a combined income of £99,999 does not lose child benefit whereas one with a single income of just over £50,000 will lose out. As ever it is important not to ignore any letters which HMRC issue and to seek advice if you are confused about how these changes will affect you and how to limit the damage.”

For further information, please contact Andrew Robinson, Director of Tax (t: 01603 756911, e: [email protected])