Changes to the rules on Child Benefit due to come in to effect on from 7th January next year could affect the tax position of anyone claiming Child Benefit. In certain cases it result in the claimant having to complete a Self Assessment Tax Return.
What is Child Benefit?
Child Benefit is a tax-free payment that you can claim for your child or for a child you are responsible for, even if you are not their parent whatever your income or savings.
Child Benefit payments usually stop when your child reaches 16, unless they are in education or training that counts for Child Benefit (i.e. GCSE’s, A-Level’s, NVQ’s, BTEC’s etc.). An advanced course at higher education level, such as a degree does not count.
You should claim Child Benefit as soon as:
• your child is born
• a child you are responsible for comes to live with you
• you adopt a child who is living with you
• you start paying towards the cost of looking after your child unless they live with someone else who is already getting Child Benefit
You can claim Child benefit by completing an application form (available from the HM Revenue & Customs website). It is usually paid every four weeks but can sometimes be paid weekly. Your Child Benefit can only be backdated for up to three months from the date the Child Benefit Office receives your claim.
If you and another person both claim Child Benefit for the same child, only one of you can receive it. Child Benefit can be paid into any bank, building society, or National Savings & Investments (NS&I) account that accepts Direct Payment. You receive £20.30 per week for your eldest child and £13.40 per week for each of your other children.
With effect from 7th January 2013 a new income tax charge will apply on a taxpayer who has adjusted net income (as explained below) over £50,000 in a tax year, where either they or their partner are in receipt of Child Benefit for the year.
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 the rate of 1% of the full Child Benefit award for each £100 of income between £50,000 and £60,000. Thus, the charge on taxpayers with income over £60,000 will be equal to the Child Benefit paid.
You have income of £54,000 and your partner has no income or an income of less than £50,000. Your partner receives Child Benefit for 2 children of £1,752 (£20.30 + £13.40 x 52) for a whole year.
The percentage tax charge will be determined as follows: £54,000 – £50,000 = 4000/100 = 40% and the consequent tax will 40% of the £1,752 which equals £700.
If, however, you have income of £70,000 and your partner receives Child Benefit for 2 children of £1,752 for a whole year, the percentage tax charge is determined as follows £70,000 – £50,000 = £20,000/100 = 200% (which is deemed 100%). The consequent tax charge will equate to the whole Child Benefit received i.e. 100% of £1,752 – the full amount of Child Benefit
Adjusted net income is the measure of income that is used for the calculation of the Child Benefit income tax charge. Adjusted net income is calculated in a series of steps:
1. work out your income that is subject to Income Tax
2. deduct grossed up personal pension contributions and gift aid donations
3. add back any relief for payments made to trade unions or police organisations previously deducted in step 2.
The result is your adjusted net income.
If you or your partner do not wish to pay the new income tax charge and you think it is the right decision for you, you can opt to not receive Child Benefit You should, however, continue to make 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 protect your future entitlement to State Pension.
You can get credits if you have a child under 12 and you are either looking after them at home or you work but do not earn enough to pay National Insurance contributions. This continues until your youngest child reaches the age of 12. Child Benefit can help you qualify for ‘credits’ for being a parent or a carer that count towards your State Pension.
You could also look to manage your net adjustable income below £50,000. For further details please consult your usual DSH contact.