The Child Benefit tax charge

The Child Benefit tax charge

Photo by Tim Bish on Unsplash

If you have children, Child Benefit is probably something you are familiar with.  However, do you understand all the rules and the potential tax charge?

Here are the basics

At the moment, £20.70 per week is paid for the oldest or only child and £13.70 is paid per child for any subsequent children, with no limit on the number of children you can claim for.

It’s paid to the person responsible for one or more children under 16 (or under 20 if they stay in approved education or training).  Therefore, if you have two children under the age of 16 the total benefit that can be claimed is £34.40 per week or £1,788.80 per annum.

Only one person can receive the child benefit, so a couple needs to choose who is going to receive it and the funds can only be paid into one bank account.  Payments are made every four weeks.

Child Benefit stops on the 31st August on or after your child’s 16th birthday if they do not continue in education or training.

Payments can continue if they stay in approved education or training, but you must tell the Child Benefit Office.  Approved education is not University or higher education.  It is defined as more than an average of 12 hours a week supervised study or course-related work experience and can include A levels, Scottish Highers, NVQs and other vocational qualifications up to level 3.

Approved training should be unpaid and can include foundation apprenticeships or traineeships in Wales, employability fund programmes in Scotland or training for success in Northern Ireland.  Courses that are part of a job contract are not approved.

Child Benefit also stops immediately if your child starts paid work for 24 hours or more a week and is no longer in approved education or training, starts an apprenticeship in England or starts receiving benefits in their own right; such as Income Support, Employment and Support Allowance or tax credits.

Sounds good but what about the tax charge?

If you or your partner receives Child Benefit and one of you is earning over £50,000pa, a tax charge may apply to the person earning over that amount to clawback or reduce the child benefit received.  This can result in a marginal rate of income tax of c.60% on earnings between £50,000 and £60,000pa.

Your income is calculated based on ‘adjusted net income’, which is total taxable income (earnings, bonuses, benefits in kind, investment income, pensions in payments and taxable rental profits) less pension contributions and gift aid donations.  The government provides a calculator to help you work this out:

If adjusted net income is under £50,000 no tax charge is applied.  If net income is over £60,000 then the tax charge equals the benefit received.  For income between £50,000 and £60,000 a sliding scale is applied.  For example, net adjusted income of £55,000 would result in half of all the Child Benefit received being clawed back via the tax charge.

So, having worked out both your and your partner’s adjusted net income, and if one or both of you are over £50,000, there are some things you can do to try and minimise the tax charge.

If you are self employed, speak to your accountant or tax adviser about any other expenses that you may be able to claim to reduce your taxable profits.

If you work through your own company, consider deferring dividends or salary to a future tax year or retain profits in the company to be drawn down later.  If you and your partner both work in a company together can salary or dividends be more evenly distributed between you?

Consider increasing your pension contributions or making a one-off contribution to reduce your adjusted net income.  Pension contributions (within limits) currently receive income tax relief and if they also reduce any Child Benefit tax charge, then they are extremely tax efficient. Plus, you are increasing your savings for retirement.

If none of the above work for you, and you wish to make a charitable donation, consider making one to reduce the taxable income of whoever may be subject to the Child Benefit tax charge.  One advantage of using this method is that a donation can be made up to the 31st January following the end of the tax year and still be counted as paid in the previous tax year.  This can be useful if your total income is unlikely to be known until after the end of the tax year.

If having calculated your net adjusted income and considered all of the above you or your partner are still earning over £60,000pa then you will pay the tax charge as part of your self assessment tax return.  It is your responsibly to inform HMRC.

If receiving and then paying the tax charge is a hassle that you don’t want, you can choose not to receive the benefit payments.  However, if you do this it is important to still apply for Child Benefit so that the person claiming still gets National Insurance Credits towards their state pension.  It also ensures that your child receives their own National Insurance number at age 16.  Note that credits towards the state pension are only received up to when your youngest child turns 12.

So, Child Benefit is a useful additional sum that anyone responsible for a child can claim, but in some cases the tax charge may mean that it becomes a hassle to do so.  I suppose the best position to be in is to be a couple each earning £49,999pa, as your earnings are assessed individually.  However, I would not recommend asking for a pay cut!