Child Benefit is changing for over a million people. Are you one? Did you do what you needed to by Sunday 6 January 2013? How do you sort this mess out?
Does this affect me?
1. Do you or your other half get child benefit? YES / NO
2. Does one of you earn over £50,000 in taxable income per year? YES / NO
If you answer YES to both then you should have done something before 7 January 2013. Did you?
What needed done by 6 January 2013?
If, due to one of you earning over £50,000, you are affected you should have done one of the following:
- Cancelled the Child Benefit claim to stop the new rules making life complicated, or
- Decided that you, the higher earner, will complete a Tax Return each year that the household gets Child Benefit. This means you must have noted that the onus is on you to register with HMRC so they know to send you a Tax Return in April 2013.
If one of you earns over £50K and you DIDN’T cancel the Child Benefit by 6 January 2013 then, unfortunately, the high earner MUST complete a 2012/13 Tax Return. This applies even if you cancel the benefit in mid-January. Though at least by doing so there would be less Child Benefit clawed back.
So, in simple terms, what’s this all about?
To reduce government spending (by some £2 Billion) the Chancellor has decided better-off families should not have the advantage of Child Benefit. To achieve this he decided, in conjunction with HMRC, that the easiest way was to hit households where one party earns £50,000.
If one party earns over £60K then, in the end, all the advantage of having child benefit will be lost. Between £50K and £60K the advantage is gradually taken away.
The problem is that not even HMRC knows all the people who are affected by this. They don’t know all your sources of income unless you already fill in an annual Self Assessment Return. Also for some people they will not have an up-to-date address. So of the 1.2 million people they wanted to write to about this big change, some 300,000 people were not contacted.
But it isn’t fair!
Correct! Nobody is claiming it is fair. It is a very blunt instrument designed to take the advantage of child benefit away from better-off families.
The main unfairness arises with looking only at individual income, not the combined income of the couple.
Example of the unfairness:
Say Ms Jones earns £60,000 then she and her non-working partner will not gain from continuing to receive Child Benefit. Indeed she may have to fill in a Tax Return each year – an added hassle.
Say her neighbours Mr & Mrs Smith each earn £30,000 then their Child Benefit claim is unaffected and they have no tax worries.
So despite the same household income, one couple loses out big time.
There is nothing to be achieved thinking about the unfairness of this system, just work out if you are affected and do what you need to do. (Write to your MP if you want the system changed.)
My income is over £50,000 – what happens?
Unless you ask to have your Child Benefit cancelled, nothing will happen. You will keep getting it.
You have however got a tax problem. Unfortunately all Child Benefit earned from 7 January 2013 becomes taxable – at a rate from 0% up to 100%. The rate rises according to your income. 0% at £50K up gradually to £100% if your income is £60K or above.
What this is doing is taking off you a tax bill which has the effect of clawing back some or all of the Child Benefit you got.
How does HMRC get the Child Benefit back?
Important – it is up to you to register with HMRC for Self Assessment using form SA1. That is the only way they will know to send you a Tax Return. Only by completing that Return will they get from you that part of the Child Benefit which the government wants back.
You MUST register by 5 October 2013, though I suggest you do it today. You can download the SA1 form at www.hmrc.gov.uk/SA1
Failure to register with HMRC leaves you liable to a penalty.
What income counts?
All income which is taxable, so that is the total of:
- Pay from jobs (P60 figure if you get one)
- Benefits in Kind from jobs (like company car, private medical cover)
- Taxable profits from a business
- Bank interest
- Taxable rents from letting out property
What if we can’t be sure one of us will earn over £50,000?
This will be common for people who are self-employed, or whose overtime or bonuses vary each year.
In this case you should continue to take the Child Benefit. If, at the end of the tax year, you discover one of you has income over £50K, then you need to register for Self Assessment and fill in a Return. If your income is below then you are in the clear for that year. You still need to check each year.
I already complete a Self Assessment Return each year. What do I do?
For you things are simpler. If you know your come will consistently be over £60K then you might as well just stop your Child Benefit claim.
Otherwise just continue claiming it.
If, once the year is over, you know your taxable income exceeds £50K then you must put the Child Benefit figure into the relevant box on your Tax Return – or ask your accountant to do it.
For the 2012/13 year only put the benefit received from 7 January 2013 to 5 April 2013. In future years you would declare the full year’s Child Benefit.
Further reading on HMRC site:
More on this subject www.hmrc.gov.uk/childbenefitcharge
To stop your Child Benefit www.hmrc.gov.uk/stopchbpayments
Estimate how much you will be charged on your Child Benefit www.gov.uk/child-benefit-tax-calculator
HMRC’s Child Benefit Helpline is 0845 302 1444.
Note the person to fill in the Stop Child Benefit online form, or phone to have it stopped, must be the person who receives the Benefit. Even if it is their other half who is the high earner.
If you might be affected don’t dig your head in the sand. Failure to understand things now will only cause you headaches in the future.
Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co – www.huston.co.uk or 028 9080 6080.