What is the High Income Child Benefit Tax Charge?
The High Income Child Benefit Tax Charge should probably be called a “charge back” because it really means that you pay back some or all of your Child Benefit when you hit a certain income threshold. Every business owner who is in receipt of Child Benefit, or is considering applying for Child Benefit, should be aware of this charge because it is something that needs to be considered on your annual tax-return.
It is especially important to appreciate that if your income goes over £50k then you are going to have to pay the charge. We’ll explain more in this article.
Let’s start from the top…
What is Child Benefit?
Child Benefit is a government benefit that can be paid every four weeks to anyone with parental responsibilities to a child under the age of 16 (or 20 if they stay in full time education or unpaid training).
Current weekly child benefit rates:
Eldest or only child: £21.15
Additional children: £14.00 per child
What are the advantages of Child Benefit?
Well, of course the key benefit is the tax-free payments you will receive to help support your family, but there is more to consider…
If your child is under 12 and you do not work or do not earn enough to pay National Insurance contributions, Child Benefit can give you National Insurance Credits ensuring you do not have gaps in your NI record, which counts towards your State Pension.
Do you still get Child Benefit if you earn over £50k?
Yes you do, but this is where the high income child benefit charge kicks in so pay attention.
You have to pay some or all of your Child Benefit back if you earn £50k or more and you or your partner receives Child Benefit.
Or if you earn £50k or more and someone else gets Child Benefit for a child living with you and they pay at least an equal amount towards the child’s upkeep. It doesn’t matter if the child living with you is not your own child.
It’s tricky but basically if you earn over 50K then you are going to be subject to the high income child benefit tax charge but it’s probably still worth claiming anyway… read on…
Is it worth claiming Child Benefit if I earn over £50K?
So this is where it can be a tad confusing. Yes, it's probably still worth claiming it, even though you will have to pay it back through the high income Child Benefit Tax Charge, which sounds a bit odd or like a lot of admin but there are three good reasons to claim Child Benefit, even if you end up paying it back:
If your circumstances suddenly change then you are automatically registered so it’s a very quick way to ensure you can get this benefit which may be really essential to your family in a time of need.
Registering for Child Benefits means that your kids will automatically receive their own National Insurance number at the age of 16.
Perhaps the most important advantage of claiming Child Benefit is that you will be able to get your National Insurance credits. So if you are self-employed and not making any voluntary NI contributions of your own* anyway then this keeps you paying up towards your state pension (you need 35 years of contributions to claim the state pension).
*If you are self employed & earning over £50k then you will be paying NI. But if you have a lower income & not paying NI but your partner is earning over £50k then it’s worth claiming Child Benefit to get your NI contributions paid, even though your partner will have to pay some or all of it back.
If you are sure you will earn enough to hit the High Income Child Benefit Tax Charge and would prefer not to claim Child Benefit in the first place then you can still receive the National Insurance credits by filling in the Child Benefit form stating you do not want to receive the payments. This will also ensure your child automatically receives their National Insurance number when they turn 16.
How is the High Income Child Benefit Tax Charge calculated?
For every £100 over £50k you earn in the tax year, you will repay 1% of the maximum amount of Child Benefit you are entitled to. Therefore if you earn £55k, you will pay back 50% of the charge. Once you reach an income of £60k, you will need to pay back 100% of the Child Benefit you received.
Paying the charge is your responsibility and you declare it via your self-assessment tax return. If you and your partner both earn over £50k, the highest earner pays the charge. Your accountant can assist you with this or contact us for advice.
What counts as earnings :
Income from rental property
Some state benefits
Legitimate deductions you can make to reduce your liability for the child benefit tax charge:
Therefore it is worth talking to your accountant about your annual tax planning because if you do earn more than £50k you may be able to reduce the Child Benefit charge by reducing your “net adjusted income” by paying a little more into your pension, which is no bad thing.
If you want to figure out for yourself what your charge might be, then check out this government Child Benefit charge calculator to get an estimate.
How far back can HMRC go back for the High Income Child Benefit Tax Charge?
Currently they will probably only go back around four years based on the success of current cases, but you’d need a really good excuse! It’s much easier to be compliant from the outset.
If you need some advice about how to figure out your income alongside Child Benefits and what you might have to pay back, please get in touch.
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