Changes to Child Benefits

You may recall that the Chancellor: George Osborne partly reversed a planned cut in child benefit, meaning more families will be entitled to help than was originally proposed, though anomalies still exist and confusion still reigns.

The result is that 1.2 million families will either lose their child benefit or get a reduced payout, according to HM Revenue & Customs (HMRC), though under the original plans 1.6 million would have lost all their entitlement.

What's more, 500,000 parents will have to fill out a self-assessment tax form each year to continue receiving the benefit. Many more will also be asked to pay a portion of their payout back.

Key Points:

- If EITHER parent earns £50k+ they get less

- If EITHER earns £60k+ they get nothing

- Combined earnings are irrelevant

- 500,000 people will be required to complete a self-assessment tax form

What the changes could mean for you?

Q1: When does this all start?

A1: The changes happen from 7 January 2013.

Q2: Who exactly is going to lose the child benefit?

A2: Under the previous plans, parents earning more than £42,475 a year each – the 40% tax rate threshold – were set to lose their payments from January 2013.

The new plans allow a family to get the full allowance as long as neither parent earns more than £50,000 a year.

Combined or household income is irrelevant. If just one parent earns over £50,000 a year, they get less.

Households where at least one parent earns between £50,000 and £60,000 a year will effectively get a partial payout.

Where one parent earns over £60,000, the family will effectively get no child benefit.

Q3: How will HMRC take child benefit away; will I just stop receiving it?

A3: No. Everyone will still be eligible but what happens next is complex.

Families where one parent earns over £50,000 still get the full benefit but will pay more tax to effectively reduce or cancel out the benefit.

They will have to declare this on a self-assessment tax form.

HMRC estimates that of the 1.2 million of families affected, 500,000 will have to fill out a self-assessment form who currently don't have to.

Q4: What if I earn over £50,000 but my partner nothing?

A4: Sadly, the result creates an anomaly whereby a family can earn £100,000 a year between them (£50,000 each) and get the full benefit.

But if one parent earns £60,001 and the other doesn't work, they'll effectively get no child benefit.

It's all about if one parent hits the threshold. Household income is irrelevant.

Q5: How much child benefit do I get?

A5: The weekly amounts, fixed for at least the next two years, are:

- £20.30 (£1,056 a year) for the oldest or only child.

- £13.40 (£697) for each additional child.

- £14.75 (£767) as a per child guardian's allowance.

Q6: What if I earn between £50,000 and £60,000? What exactly happens?

A6: If at least one parent in your family earns in that bracket they will still get the full child benefit.

However, they will pay extra income tax to reduce the gain.

This will be charged at 1% of the total child benefit per extra £100 they earn over £50,000 a year.

This will be based on the salary of the highest earner of the two.

The table below highlights how much child benefit a family with two kids will get, after tax.

Highest Earner Salary	Annual Child Benefit After Tax
£40,000	£1,752
£50,000	£1,752
£55,000	£876
£60,000	£0

Based on family with two children

Q7: What counts as income?

A7: This includes everything you'd normally have to declare for tax purposes, and is based on actual income, not estimated income.

This includes, but is not limited to:

- Your salary

- Any second job

- Savings interest

- Rental income

Q8: For what period do I have to declare income?

A8: The income that counts is what you earn in the tax year for which you claim child benefit.

Q9: What if income is irregular?

A9: What is important is not when in the year you earn money but how much you earn per financial year. So only the total matters.

Q10: What if I earn over £50,000? Which parent is taxed extra?

A10: If both earn over £50,000, the partner with the highest income will be liable to the charge. If just one earns over £50,000 they will have to pay the extra tax.

Q11: What if I earn over £50,000? When do I pay this extra tax?

A11: The new regime is an 'earn now, pay later' system. If you collect child benefit in the 2012/13 tax year when the change happens, you must declare your 2012/13 income by 31 January 2014, at which point the tax will be due.

HMRC says those in the PAYE system may have the option to pay the tax as part of their standard pay packet tax deduction, but this detail has yet to be confirmed.

Q12: So if I earn over £50,000, what do I do?

A12: For taxpayers in the PAYE system, you will have to fill out a self-assessment form for the period in which you've claimed child benefit.

HMRC will write to you in the autumn to explain exactly what you need to do next.

If you already fill out a self-assessment form, you will need to include the information relating to child benefit in your tax returns for 2012/13 and beyond, and will be charged as part of your overall tax bill.

Q13: What if I earn over £60,000? What are my options?

A13: You can choose not to take child benefit to avoid the complication of additional tax.

But you can also choose to take it, though the extra tax will wipe out the entire pay out.

HMRC stresses it is still important to complete claims for any new children, even if parents don't actually get any child benefit.

For each week you are entitled to the cash, you could qualify for National Insurance credits which can help to protect future entitlement to the state pension.

Q14: What counts as 'living together' to determine income?

A14: HMRC includes any two adults who live together, whether they are married or not.

Q15: How will HMRC monitor if people live together?

A15: This information is unclear at present.

Q16: What if I am separated from the other parent? Does a step-parent's income count?

A16: As only one parent can claim child benefit, HMRC will assess all earners within the household within which the benefit is claimed.

If that household includes a step-parent or someone who is not the child's parent, their income still counts.

Q17: What if the child is in custody at two places?

A17: Again, HMRC will assess all earners within the household within which the benefit is claimed.

Separated parents may decide to change who claims child benefit to side-step the tax.

Child Benefit Income Tax Charge

HM Revenue & Customs Q & A

Legislation will be introduced in Finance Bill 2012 that imposes a new charge on a taxpayer who has adjusted net income over £50,000 in a tax year, where either they, or their partner, is in receipt of Child Benefit for the year. This will have effect from 7 January 2013. If both partners have adjusted net income over £50,000; the partner with the higher income is liable for the charge.

The income tax charge will apply at a rate of one per cent of the full Child Benefit award for each £100 of income between £50,000 and £60,000. The charge on taxpayers with income above £60,000 will be equal to the amount of Child Benefit paid.

Child Benefit claimants will be able to decide not to receive Child Benefit if they or their partner do not wish to pay the new charge.

For the tax year 2012-13, the first year of the charge, the amount of income taken into account will be the full amount of income for 2012-13 and the amount of Child Benefit will be that paid in the period from 7 January 2013 to the end of the tax year. For subsequent years, the full amount of Child Benefit and the income for the year will be taken into account.

Removal of child benefit from higher rate taxpayers

Q1: What does the announcement mean?

A1: There will be a new income tax charge for someone who has income over £50,000 and either they or their partner receives Child Benefit. There will be no tax charge to pay if neither you nor your partner has income above £50,000.

The amount of the income tax charge will depend on the level of your income over £50,000.

If your income is between £50,000 and £60,000 you will have to pay a tax charge of 1% of the amount of Child Benefit for every £100 of their income above £50,000. If your income is above £60,000 you will have to pay a tax charge that equals the amount of Child Benefit.

For example, if you have income of £54,000 and you or your partner receives Child Benefit for 2 children of £1752 for a whole year, the charge will be 40% of the £1752 Child Benefit = £700. The percentage is determined as follows £54,000 - £50,000 = 4000 /100 = 40%.

If you have income of £70,000 and you or your partner receives Child Benefit for 2 children of £1752 for a whole year, the charge will be on £1,752 which is the full amount of the child benefit received.

The amount of Child Benefit you can claim and receive is unaffected. Child Benefit can continue to be paid to you or your partner even if either you or your partner is liable to pay the charge.

Q2: How do I know if I'm affected by the change?

A2: You could be affected if you or your partner:

- receive Child Benefit on or after 7 January 2013 and

- One or both of you have income above £50,000

Q3: What do I need to do if I'm affected by the change?

A3: The proposed change that was announced does not take effect until January 2013. There is no need for you (or your partner) to take any action yet.

HMRC will write to all taxpayers potentially affected by this change in the autumn with further guidance on what options will be available and what needs to be done at that stage.

The HMRC website will also be updated when more details become available.

Q4: How can I work out what my income tax charge will be?

A4: If your income is between £50,000 and £60,000 you will have to pay a charge of 1% of the amount of Child Benefit for every £100 of your income above £50,000. If your income is above £60,000 you will have a tax charge that equals the amount of Child Benefit.

For example, if you have income of £54,000 and your partner receives Child Benefit for 2 children of £1752 for a whole year, the charge will be 40% of the £1752 Child Benefit = £700. The percentage is determined as follows £54,000 - £50,000 = 4000 /100 = 40%.

If you have income of £70,000 and your partner receives Child Benefit for 2 children of £1752 for a whole year, the charge will be on £1,752 which is the full amount of the child benefit received.

Q5: I don't work, but my husband/partner has income above £50,000. Will I lose my Child Benefit, as it is paid directly into my bank account?

A5: No, you can continue to receive the full amount of Child Benefit but your husband will be liable to pay the income tax charge.

Q6: I'm a single parent/recently separated but my ex-partner is a high earner - will his income affect my Child Benefit payments?

A6: You can continue to receive your Child Benefit payments in full. However, if your income is above £50,000 you will be liable to pay the income tax charge.

Q7: My income is above £50,000 and I have recently separated from/joined a partner who receives Child Benefit - how does this affect my liability to the income tax charge?

A7: If you separated from your partner part way through the tax year you will only be liable to the new income tax charge for the period up to the date that you split up, and not to the end of the tax year on 5 April.

If you joined your partner part way through the tax year you will only be liable to the new income tax charge from the date that you started living together and not from the beginning of the tax year 6 April.

Q8: Can I stop claiming Child Benefit so that I or my partner do not have to pay the tax charge?

A8: If you think it is the right decision for you, you will be able to choose not to receive your Child Benefit payments which would mean that you/your partner would not be liable to the new income tax charge. But you should continue to complete claims for any new children even though you will not receive any Child Benefit payments for them. This is because for each week that you are entitled to Child Benefit you could qualify for National Insurance credits which can help to protect your future entitlement to State Pension. You can get credits if you are entitled to Child Benefit for children under the age of 12. This continues

until your youngest child reaches the age of 12.

Q9: I have income above £50,000 and I claim Child Benefit for my own child/children and also for my grandchild/children who all live with me - how much tax am I liable for?

A9: You will be liable to pay the income tax charge for all of the children because you claim for them all and they all live with you. The amount of the income tax charge will depend on your income and how much Child Benefit you receive. You will have a charge of 1% of the amount of Child Benefit for every £100 of your income above £50,000. If your income is above £60,000 you will have a tax charge that equals the amount of Child Benefit.

Q10: Both my partner and I have income above £50,000 and I receive Child Benefit, which of us will be liable for the income tax charge?

A10: As the Child Benefit claimant, you will be liable to pay the income tax charge unless your partner's income is higher than yours. In this case, your partner will be liable to the charge.

Q11: How will I have to pay the tax charge?

A11: If you are liable to pay the charge, HMRC should send you a tax return to complete during April 2013. You can find general information about tax returns and Self-Assessment on the HMRC web site.

You do not need to do anything yet. HMRC will write to taxpayers in the autumn to explain what they need to do next and what options will be available. If you do not hear from HMRC in the autumn, you will be able to find information on HMRC's website at that time which will tell you what you should do.

Q12: When will I have to pay the amount due for 2012/13?

A12: The earliest that you will have to pay the amount due for the 2012/13 tax year will be during the 2013/14 tax year.

Written by Paul Southward at KSK Luton. The information contained in this publication is provided for information purposes only and is of a general nature. It is not a substitute for specific professional advice based on your own particular circumstances. You are recommended to take specific professional advice from a professional accountant before taking any action. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or Keens Shay Keens Limited.