Child benefit - so you have got a letter
HM Revenue & Customs (HMRC) is sending letters to about a million people that start with the question: "Are you affected by changes to child benefit?"
The letters are brief, though they do come with a help sheet, and will no doubt raise a lot of questions in recipients' minds.
What follows will, hopefully, answer most of those questions.
What is it all about?
The government has decided to withdraw child benefit (CB) from high-income households.
However, rather than actually cancel the payments, it is imposing a tax charge to claw back some or all of the benefit received.
This new High Income Child Benefit Charge (HICBC) starts from 7 January 2013.
An HMRC tool can help most combinations of households decide if they are caught by the new charge.
Income above £50,000 means paying a charge of 1% of the CB for every £100 of income above that £50,000 base level.
So if your income is £57,000 your tax charge equals 70% of the CB received.
Those with income of £60,000 or more will face a tax charge equal to the whole of their household's CB.
I have got a letter - what do I have to do?
First, in the immortal words of Corporal Jones, "don't panic".
The letter is not a tax demand, nor does it require an immediate response.
But those who get one of the letters (and, indeed, some who do not) need to think about their situation and may need to take action before 7 January 2013.
Do bear in mind that the worst that can happen is that the tax bill claws back all of your CB. It can never exceed the CB received.
Who is getting a letter?
HMRC is sending letters to people it thinks:
- have income over £50,000 (or have a partner who does); and
- receive child benefit (or have a partner who does)
If this really is not your situation - you do not get CB, or you and your partner each have income below £50,000, then you can ignore the letter.
There is one small group of people who may not be caught by the HMRC's mail-shot but could be liable for tax.
Suppose you are a parent, a single mother for instance, and you give some of your child benefit to the child's grandparents because they look after your child while you go out to work?
If one of the grandparents happens to earn more than £50,000 a year, then the fact that they are receiving some of your child benefit will trigger a tax bill for them.
What counts as income?
Income here is "adjusted net income" - all taxable income for the tax year in question. The "net" is because pension contributions and payments to charities can be deducted.
Income includes salary, taxable benefits-in-kind such as a company car, net-rental income, and gross-interest income.
There is a calculator on the new gov.uk website to help you.
Child benefit facts
- Child benefit is a tax-free payment that is aimed at helping parents cope with the cost of bringing up children
- One parent can claim £20.30 a week for an eldest or only child and £13.40 a week for each of their other children
- The payments apply to all children aged under 16 and in some cases until they are 20 years old
- The system is administered by HM Revenue and Customs, which pays out to nearly 7.9 million families, with 13.7 million children
Who counts as a partner?
This includes a husband, wife or civil partner unless you are separated in a way that is expected to be permanent.
However, the term also includes someone with whom you are living as if they are your husband, wife or civil partner - which, inevitably, is going to cause some uncertainties.
The point is that the HICBC attaches to the higher earner of the couple.
So for many married couples caught by the HICBC, that will mean the wife receiving CB, but the husband receiving a tax bill to claw back some or all of the CB.
It will undoubtedly be the case that, for some people, their positions will change during a year.
The amount of the HICBC is calculated by reference to the period the couple were together.
I think I am liable - what are my choices?
As HMRC's letter says, you can choose whether to:
- stop receiving CB and avoid the charge, or
- keep getting CB and declare the payments for income tax purposes
This is really something that partners need to decide jointly.
Those who believe they are definitely going to lose all their CB may decide to stop getting the CB in the first place.
The person receiving CB needs to fill in the online form at www.hmrc.gov.uk/stopchbpayments or call the CB helpline on 0845 302 1444.
Those who are not sure what their income will be, or who think their income will be in the £50-60,000 bracket, or of course those whose income is below the threshold, will probably decide to keep receiving CB.
It makes sense to monitor the position during the year and consider putting a bit of money aside if there is going to be a charge.
Do I have to tell HMRC I might be liable for HICBC?
Yes. If you do not normally fill in a self-assessment tax return, you will need to tell HMRC by completing form SA1 - see www.hmrc.gov.uk/sa1 - by 6 October after the end of the tax year.
How do I pay HICBC?
In principle HICBC will be due for payment at the same time as self-assessment liabilities.
So, the first charges, for CB for the three months 7 January - 5 April 2013, will be due for payment by 31 January 2014.
If you do not want to pay the HICBC in a lump sum, you can choose to pay the charge through PAYE codes.
So the underpayment for 2012-13, and your ongoing in-year liability, could be collected through your tax code in 2014-15.
What if I make the wrong choice?
There is no penalty for keeping receiving CB if you (or your partner) have a high income.
You just need to tell HMRC so they can levy the HICBC. And you can stop the CB payments at any time.
More importantly, some people will stop the payments and then find their income does not reach the £60,000 level after all, or they split up with a partner who had the high income.
In this case they can reinstate the CB payments.
Such reinstatement can be made retrospective for up to two years.
Bear in mind that if your income was the lower one but still over £50,000, you will have to pay a tax charge too.
My partner and I do not talk about finances. How do I find out our position?
How it might work
- Janet, a single mother, has one child and accordingly has CB of £1,040 for the tax year.
- Her income is £52,000.
- Half way through the year she moves in with John, who has income of £65,000.
- For half the year, Janet is liable to HICBC.
- With income £2,000 (20%) above the base level, she faces a tax charge of 20% of the CB for the six months she is on her own: £104.
- For the second half of the year, John is liable to the HICBC and he will face a full claw-back charge of £520.
It will be possible to get some information from HMRC.
It will be able to say if your partner gets CB; also, based on the information it holds, whether your partner's income is higher than yours.
I did not get a letter - am I still potentially liable for HICBC?
Yes. The same principles apply as set out above.
HMRC cannot guarantee to contact all affected people, particularly where relationships are changing.
It has a lot of useful information at www.hmrc.gov.uk/childbenefitcharge.
It also offers a helpline on 0845 302 1444.
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