Back in 2010, George Osborne introduced a tax charge specifically directed at higher earning families, designed to fully claw back the Child Benefit payments made where the person in receipt of Child Benefit or their partner has individual annual income of £60,000 plus. The charge results in a partial claw back of Child Benefit where individual annual income exceeds £50,099 but is less than £60,000.
Unfortunately, almost a decade later, we are seeing some of the unintended consequences of this back-handed approach coming into play.
With the deadline for Self-Assessment Tax Returns due at the end of this month, we thought a quick catch up on the regulations might assist those with young families.
Claiming Child Benefit is optional but, in our view, definitely worth doing.
Child Benefit is currently £20.70 per week for the first child and £13.70 per week for second and subsequent children.
• If a stay at home mum with 2 children chooses not to work for, say, 10 years and decides not to register for Child Benefit due to her partner’s income exceeding £60,000 per annum, the household “loses out” on £17,888 based on current rates.
• If she does receive the benefit and her partner consistently earns more than £60,000 per annum, then over the same period, although they will have received the £17,888 Child Benefit, the partner will pay an additional £17,888 via Self-Assessment tax.
• Alternatively, she could register for Child Benefit but choose not to receive the payments.
Whilst in all 3 cases above, the short term impact is the same, the sting comes to the first option many years later where, having not registered for Child Benefit, the mum then finds her NI record for State Pension falls 10 years’ short.
In today’s terms, this shortfall is equivalent to almost £47 per week of the new state pension – almost 40% more than the value of the Child Benefit for 2 children, above!
What Should You Do?
• If you or your partner are receiving Child Benefit and one of you has income in excess of £50,000, that person should be completing a Self-Assessment tax return and declaring their position for each tax year for which Child Benefit has been received. If you both have income over £50,000, the person with the higher income should complete the self- assessment return.
• Failing to declare Child Benefit receipt can lead to a tax reclaim being made by HMRC, plus penalties and interest for all affected years, which could run into several thousand pounds.
• You should register for Child Benefit – even if you then opt out of receiving the benefit.
• The charge is measured against the higher earner’s total taxable income. Using tax breaks such as additional pension contributions, Gift Aid payments and ensuring income producing assets are held in the relevant person’s name are all fully legitimate ways of controlling one’s taxable income.
Remember, the deadline for Self-Assessment for 2017-18 is the end of January 2019, so if you have a young family or know others that have, do pass this note along.
If you would like to discuss this or any other tax or investment planning arrangements further; please do not hesitate to contact us.