April 15th 2015
Most of us have got used to the topsy-turvy rules for Child Benefit and higher earners, where one member of a couple receives Child Benefit in full, and the other may have to pay part of it back to the Government through self-assessment, if earnings are over £50,000 a year. This is called the ‘High Income Child Benefit Charge’.
It looks like this: Jean and Ken have one child. Jean is the main carer and gets child benefit of £20.50 a week (in 2014/15). Ken earns just over £52,000 a year and has to pay back £213 of the Child Benefit through self assessment. But it is still possible for the detailed rules to catch people out.
Are you missing out?
The basic principles are clear enough. Where a single parent, or member of a couple, has income of over £50,000 a year, there will be a High Income Child Benefit Charge. The charge is 1% of the Child Benefit due, for every £100 of income over £50,000. This means, mathematically, that all the Child Benefit will have been clawed back where income reaches £60,000. In consequence, where earnings are over £60,000 a year, it simplifies the administration if the person entitled to the Child Benefit (who may not be the higher earner of the couple), makes an election to forgo the Child Benefit.
But now for the surprises. Income here means ‘adjusted net income’. This is a technical term meaning that you deduct the gross equivalent of pension contributions which have received basic rate tax relief at source, and Gift Aid payments. So if the ‘high earner’ makes significant pension contributions or Gift Aid payments during the year, you may find that you have a net Child Benefit entitlement after all.
If this happens, you are allowed to restart your Child Benefit claim, but the high earner will now be liable to pay the Child Benefit charge through self assessment. You can ‘change your mind’ within two years of the end of the tax year in which you would have been entitled to Child Benefit. Unfortunately, if you delay, this could mean changes to your self assessment return and possible interest and late payment penalties.
Who pays the piper?
Another hazard for couples is where both members of the couple earn close to the £50,000 or £60,000 limits. It may seem like a technicality, but HMRC doesn’t just want the money, it wants the money from the right person.
Jack and Jill have two children. Their Child Benefit entitlement in 2014/15 is £20.50 a week for the elder child and £13.55 a week for the younger child (£1,770.60 a year in total). Jack paid the High Income Child Benefit Charge in 2013/14.
In 2014/15, Jill earns £52,000 as an employee and is not registered for self assessment. Jack is self-employed. He usually earns about £55,000 a year, but in 2014/15 he invested in a new computer system for the business and his taxable profit falls to £51,000.
As Jill is the higher earner for 2014/15, she will need to register for self assessment (before 5 October 2015) and pay the High Income Child Benefit Charge by 31 January 2016.
The rules apply to all couples whether married, civil partners, or simply living together. Exceptionally, the High Income Child Benefit Charge can even apply where the child is living with someone else, but you are supporting them and claiming Child Benefit. All in all, whoever is looking after the children, if someone is claiming Child Benefit and you are connected with that person, it’s time to talk to your tax adviser.
Please give DSC Chartered Accountants a call on Harrogate 560547.
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