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Child Benefit and tax if you have a high income

Child Benefit has always been paid to all families with children, regardless of household income. However, this is changing from 7 January 2013. Her Majesty's Revenue and Customs (HMRC) has written to families who may be affected by tax changes if they want to continue getting Child Benefit. Find out what the changes mean for you.

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.

Next steps

Find out more about the High Income Child Benefit Charge on hmrc.gov.uk

Check if you're affected using an online calculator on hmrc.gov.uk

Ask for your Child Benefit payments to stop on hmrc.gov.uk

More about how to find an independent financial adviser.

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