On 7 January 2013 the government will be implementing changes to the Child Benefits system.

Changes

The changes will affect claimants of child benefit and their partners where one party has an annual income exceeding £50,000.

Where the claimant or their partner earns between £50,000 and £60,000 per annum, for every £100 of income that exceeds £50,000, they will be subject to an income tax charge of 1% on the child benefit received.

Where annual income is over £60,000 a 100% charge will apply and as a result the benefit is effectively cancelled out.

Where both partners have an income of over £50,000, the charges will only apply to the highest earner.

If the claimant and their partner have only been living together for part of the year, then the partner is only potentially liable for the part of the year that they were living with the claimant as 'partners'.

Definition of partner

For the purposes of these changes, 'partners' are defined as:

  • A married couple living together
  • Civil partners living together
  • A man and a woman who are not married to each other but who are living together; or
  • A man living with a man or woman living with a woman, who are living together as if they were civil partners.

Example

Child benefit for one child is £1,055.60 per annum.Where the claimant's salary is £55,000, the charge will be £528 (which is £10.56 for every £100 over £50,000). The net effect is therefore that the claimant would receive 50% of the child benefit sum.

Tax return

The higher earner will need to declare the tax payment on child benefit received on their self-assessment tax return. If they do not usually file a tax return, they will need to notify HMRC that they are required to do so before 5 October following the end of the tax year.

For the tax year 2012/13, HMRC should be notified by 5 October 2013.

Election not to receive child benefit

Claimants can elect not to receive child benefit from 7 January 2013.

Election not to receive child benefit is only suitable if the claimant or their partner earns £60,000 or more. The overall result will reduce the administrative burden and be tax neutral between the affected couple.

For any income between £50,000 and £60,000, net income will be maximised by claiming the benefit and paying the charge.

If the claimant or their partner's salary turns out to be less than expected and falls under the £60,000 threshold, any election can be revoked within two years of the end of the tax year and child benefit will be paid.

Impact

The government's objective is to address the economic deficit by requiring those on higher incomes to contribute more. It is anticipated that the changes will affect approximately 1.2 million families with 70% of those affected losing all of their child benefit.

The government was due to contact affected families this autumn in advance of the changes; however, we need to make sure our clients are aware of the impact and, if they earn in excess of £60,000, it is important that they consider electing not to receive child benefit. For those earning between £50,000 and £60,000 they need to ensure that they file a self-assessment tax return.