A previously-announced measure that has stirred up much controversy is finally coming into force in January 2013. The Government originally announced in 2010 that Child Benefit would be withdrawn from those households where one parent or partner earned enough to pay higher rate income tax. The problem was that Child Benefit was to be withdrawn completely if only £1 of household income was liable to higher rate tax, so that a small amount of additional income could lead to the withdrawal of a far larger amount of Child Benefit. This so-called “Cliff Edge” effect was roundly decried as unfair; even more so as it only looked at the income of each member of the household, rather than at the income of the household as a whole. In theory, the original proposals allowed two partners to earn around £42,000 each and still receive Child Benefit, whereas a household with only one earner whose income was around £44,000 would receive none. The Government determined to make no concessions to these inequities, but was ultimately forced to modify its proposals and it is these new rules that will come into effect in January.
Under the new rules, Child Benefit will be withdrawn gradually from those households where one parent or partner earns more than £50,000 a year and withdrawn entirely from those families where someone earns more than £60,000 a year. The way in which this will happen is to withdraw 1% of the entitlement to Child Benefit for every £100 by which the income of the high-earning partner exceeds £50,000. In addition to a possible reduction in the amount families receive, an additional burden may be imposed because the claw-back will be made via the Self Assessment tax return of the high-earner. If that person does not already file a return, they will now have to register with HM Revenue & Customs (“HMRC”) in order to do so. If this sounds like an administrative headache for all concerned, that is because it is! HMRC estimate that an additional 500,000 people will have to file Self Assessment returns for 2012/13 onwards – that’s an extra half a million “customers” for HMRC from this one change alone. So much for tax simplification!
People affected by these changes will soon get a letter from HMRC outlining changes to the benefit. The Institute of Chartered Accountants in England & Wales has put together some advice concerning the new “high income Child Benefit charge” as it is known, and this includes:
- Talking to your partner about how the new rules could affect the family’s finances. They may not know about this new rule.
- Speaking to your partner about their income. You need to know if theirs is more than £50,000 and, if so, which of you earns the most.
- What is important is the relevant individual’s total income. This is all income, not just salary or self employed earnings.
- Consider whether any Gift Aid payments or pension contributions have been made. These can be deducted when determining the final income figure.
- Make sure you file your tax returns on time. There are penalties if you are late.
- If you are not sure about the new rules, seek professional help. HMRC will offer advice, but dealing with this issue remains your responsibility.
There is little doubt that these changes will complicate matters considerably for many people, particularly for those brought within the Self Assessment system for the first time. What is beyond doubt is that those affected must take action soon.
Carl Barwick – Tax Manager
Westbury Accountants and Business Advisors is an accountancy practice based in London. Westbury have been providing Accounting and Tax solutions to small and medium sized businesses since 1936. Talk to the team at Westbury on 0207 253 7272 or visit http://www.westbury.co.uk.