High income child benefit charge – elections not to receive child benefit

On 25 October, HMRC announced that parents who opt out of claiming child benefit in order to escape a child benefit tax charge can claim child benefit if their income subsequently falls.

Earlier this year the Government announced that child cenefit will be transformed into a means-tested benefit.  This will be achieved by the introduction of a ‘High Income child benefit charge’, which will apply to those whose income exceeds £50,000 a year. Where income exceeds £60,000 there will be a corresponding income tax charge to the value of the child benefit claimed through the year.  Where income is between £50,000 and £60,000, there will be an income tax charge to claw back some of the child benefit claimed.

The charge will come into effect for 2012/13 and will apply to individuals whose income exceeds £50,000 a year if they or their partner receive child benefit.  If both partners’ income exceeds £50,000, the charge will apply only to the partner with the highest income.

Rather than paying the charge, taxpayers may elect not to receive child benefit. However, there was some concern that individuals would then find it difficult to claim the benefit where they had made such an election.  HMRC have now announced that the election may be revoked within two years of the relevant tax year.

For 2012/13, the charge will only apply to child benefit payable from 7 January 2013.  The charge will be collected through self-assessment and PAYE.  HMRC will be writing to taxpayers with income above £50,000 next month (see attached letter) and those affected will need to either :

(a) elect to stop getting child benefit from 7 January 2013, and avoid the new charge, or

(b) keep getting child benefit after this date and declare the payments on their self-assessment tax returns.

The ICAEW has warned that 500,000 people will need to start submitting tax returns as a result of these new changes.  Although submitting tax returns may be costly for both the taxpayer and HMRC, there may be good reasons why an individual may choose not to elect out of the child benefit charge and complete a return because:

  • Their income is between £50,000 and £60,000 and therefore the child benefit may be  greater than the income tax charge.
  • Receiving child benefit allows the lower earning parent to build NIC credits, which may be important if they want to receive a state pension.
  • Although an election to not receive child benefit may avoid a tax charge for the higher earning parent, the lower earning parent will be out of pocket.  Only the lower earning parent receiving child benefit can elect not to receive the benefit.

If you would like further information in the child benefit tax charge please contact the TaxDesk on 0845 4900 509 and ask for Priya Dutta.