Background to the High Income Child Benefit Charge
The High Income Child Benefit Charge (“HICBC”) broadly applies to taxpayers whose adjusted net income is over £50,000 for the year and either they or their partner claims child benefit. Adjusted net income is an individual’s total taxable income less gross pension contributions, gross Gift Aid, and certain other tax reliefs.
The HICBC is calculated as 1% of the relevant child benefit payments for each £100 of adjusted net income above £50,000. This means that individuals whose adjusted net income is £60,000 or more will have to pay a charge equivalent to 100% of the child benefit claimed in the year. The payment is made via a Self-Assessment Tax Return (“SATR”).
Relevant child benefit payments also include claims made by an individual’s partner for a child that is not theirs, for example a child from a previous relationship. A taxpayer’s partner does not have to be their spouse or civil partner and HMRC may interpret someone who an individual has lived with for a long period of time as being their ‘partner’ for the purposes of the HICBC.
Whilst the conditions for the HICBC are applied annually, entitlement to child benefit and an individual’s relationship status are considered weekly. The disparity means that a taxpayer may find themselves facing an unexpected HICBC during the year.
One such occasion would be if the taxpayer’s salary increased due to them being awarded a higher salary or moving from a part-time to a full-time job. If the individual’s adjusted net income rises above £50,000 in the year, they will become liable to pay the HICBC during the tax year and will need to register and complete a SATR if they do not already file SATRs.
Another situation where a taxpayer may unexpectedly have to pay a charge is if they separate part the way through the tax year and begin receiving an additional source of income following the separation which leads to their adjusted net income being over £50,000. The child benefit used to calculate the HICBC will be restricted to the amount received for the part of the year when the couple were together, however, this still can be an unexpected charge if they did not think the additional income earned after separation would be included in the calculation of adjusted net income for HICBC purposes.
Taxpayers who do not submit SATRs may be building up undeclared HICBC liabilities, which are accruing late payment interest resulting in an even higher liability payable to HMRC. If you suspect that you may be liable to the HICBC, it is important to seek advice from HMRC or a tax adviser. If you need to file a SATR, you must register by 5 October following the end of the tax year to prevent a failure to notify penalty arising.
Missing out on Child Benefit and National Insurance Credits due to a change in circumstances
Individuals who are not earning and claim child benefit receive National Insurance (“NI”) credits which makes sure they still qualify for benefits, such as the State Pension. Individuals can claim child benefit and opt out of receiving payments to prevent the HICBC being payable whilst still receiving NI credits. This means that if the earning spouse/partner has a reduction in income resulting in them no longer being liable to the full HICBC, the child benefit can be backdated to the start of the tax year and the non-earner would receive some child benefit in that tax year as well as receiving NI credits for the entire year. However, if child benefit was never claimed then the child benefit can only be backdated three months and the non-earning spouse/partner will have lost out on NI credits for the other nine months of the tax year.
Therefore, it is worth claiming child benefit and opting out of payments if the individual or their spouse/partner will be liable to the HICBC, to ensure that NI credits are received if relevant and the child receives their NI number automatically prior to turning 16.
The disparity of who the HICBC applies to
HICBC results in a family where one parent has adjusted net income of £60,000 and the other earns nothing (total household income of £60,000) effectively receiving no child benefit yet a family where both parents have adjusted net income of £50,000 (total household income of £100,000) will be able to retain the full amount of child benefit they have claimed. This is not only unfair to families where there is a one ‘higher’ earner, but it is also illogical when a family with one higher earner will almost certainly have less income overall than a family where both parents earn a mid-high salary and will be more in need of the child benefit. This disparity is certainly an aspect of the HICBC that needs to be addressed to ensure all families are treated fairly under the HICBC.
The future of the HICBC
There are calls to increase the £50,000 threshold to at least be in line with the higher rate tax band, however, no changes are expected in the foreseeable future. As salaries increase to keep up with inflation, more taxpayers will be affected by the HICBC, and it is important to be aware of when you could become liable to the charge to avoid a shock when completing your tax return following the end of tax year.
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