Thursday, 4 October 2012

Child benefit withdrawal

As part of the reforms to the welfare system, Child Benefit will be withdrawn from households that include certain higher earners beginning from 7th January 2013. In other words these rules will already apply from this tax year 2012/2013. This is regardless of whether you are a single parent or have a partner.

How will they do this?

This will take the form of a tax charge at a rate of 1% of the child benefit per £100 above an adjusted net income of £50,000. Once the adjusted net income exceeds £60,000 the tax charge will be equal to the Child Benefit. This applies even if one partner is earning over the limit and the other one is under and is receiving Child Benefit.

For example if someone has child tax benefits of £1,752 and had an adjusted net income of £57,750, you would first calculate the percentage by taking 57,750 minus 50,000 and divide the remaining 7,750 by 100 which equals 77% (rule of rounding is to round down to nearest whole number). Then you would take 77% of £1,752 which equals a Child Benefit tax of £1,349.

The tax is calculated by reference to weeks therefore it will only apply in the weeks you are eligible for it. For example if a couple gets together and child benefit is already being paid, then the tax will apply for those weeks from the date the couple started living together until the end of the tax year.

Who is a partner?

HMRC have decided that a partner is defined as a spouse or a civil partner or someone that you are living with as if they were a spouse or civil partner.

As long as one partner is in receipt of Child Benefits and either partner has an adjusted net income greater than £50,000 then it is the partner with the income over £50,000 who will be responsible for paying the tax.

What is the effect of the tax charge?

The following table shows how this income benefit tax will affect three different couple with different amounts of adjusted net income.

Partner 1 Income £
Partner 2 Income £
How much
Who pays the tax
50% of benefit
Partner 2
100% of benefit
Partner 1

There is of course concerns that this system is flawed, in the above examples, all three couples earn between them £85,000 yet Couple B is charged 50% of their benefit and Couple C loses all of their benefit. While Couple A retains all of their Child Benefits.

Therefore the most beneficial scenario would be where both partners earn up to £50,000 each for a total adjusted net income of £100,000 with no Child Benefit tax becoming due.

Another potential flaw is who is responsible for paying the tax. With Couple B Partner 2 will pay the tax regardless of who is receiving the child benefits, and with Couple C it will be Partner 1. Therefore you will need to discuss with your partner how much each of you is earning.

What to do if you meet the requirements for the tax charge.

Should you meet the requirements for the income tax charge, you will need to inform HMRC as soon as possible or no later than 5th October 2013, failure to do so can result in a penalty equal to the amount charged to your income tax.

If you feel you would like more information or advice on this subject, help is only a phone call away on 01761 436 436.


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