The government has launched new regulations to tax the receipt of child benefit by households with at least one high earner, defined as being income over £50,000 a year.  A Higher Income Child Benefit Charge (HICBC) will be levied at 1% of the child benefit received for every £100 of income in excess of £50,000.  Therefore when income reaches £60,000 the tax charge levied will match the amount of child benefit received.  If there is more than one high earner in the household then the charge applies to the individual with the highest earnings.

For many households with high earners whose income is currently taxed through PAYE this will result in the need to complete a self-assessment tax return.  HMRC has estimated that 1.1 million people will need to pay HICBC and that 300,000 more people will need to complete a self-assessment tax return as a result of the charge.

If annual income will exceed £60,000 then the recipient of the child benefit can make an election not to receive the benefit and while this can dispense with the need to complete a self-assessment tax return it can cause delay in receiving child benefit if income varies significantly during the year and the election is later cancelled. If income falls below £60,000 then the election can be cancelled and this revocation can be backdated for up to two years but a HICBC will still be payable on income between £50,000 and £60,000. Rather than elect not to receive child benefit there will also generally be a cash flow advantage to tax payers earning over £60,000 from continuing to receive child benefit but paying the tax at a later date.

Income for the purpose of calculating the HICBC is taxable earnings (from all sources – including interest on savings and any income from letting property) after allowable deductions such as pension and gift aid contributions so it may be possible to avoid the charge by increasing pension contributions or utilising spouse’s tax allowances and otherwise controlling income in small businesses e.g. through timing of dividend payments for limited companies.

The deadline for opting out of child benefit for the 2012/13 tax year is 7 January 2013.  There will
be no HICBC levied for 2012/13 on anyone opting out before this date but high income tax payers electing to opt out after 7 January will still be subject to a 2012/13 HICBC for child benefit received after that date.  Anyone not already covered by self-assessment and due to pay HICBC for the first time must notify HMRC by 5 October 2013 and complete a self-assessment tax return.

If you need help with completing a self-assessment tax return as a result of the Higher Income Child Benefit Charge then call Katy at Pemberley Accounting Services today on 078 105 18812 for your free initial consultation.