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Are you affected by the new Child Benefit rules?

January 7, 2013

Controversial changes to the Child Benefit regime went live on 7th January 2013. The benefit is no longer universal, and will be reduced when one parent earns over £50,000 per year, and scrapped entirely when earnings reach £60,000.

Having announced the changes during Budget 2012, the Chancellor plans to raise up to £2bn per year by withdrawing Child Benefit from up to 1.1 million higher earners. Part of the reasoning behind the changes is presumably to demonstrate that the Coalition is targeting better-off taxpayers as well as the less well-off with its austerity measures.

New Child Benefit eligibility rules

The benefit will be reduced by 1% for each £100 one parent earns in excess of £50,000. The benefit will be completely removed when income reaches £60,000.

However, a significant anomaly exists in the way the changes have been made. If both parents earn £49,000 per year, for example, the family will continue to receive their full Child Benefit entitlement, despite the combined income of both parents reaching £98,000.

Although HMRC sent out advance warning to taxpayers it believed would be affected by the changes, many small business owners were not informed, as their PAYE records may not have shown their final annual income (for example if earnings were in the form of a small salary and company dividends).

Taxpayers were able to voluntarily opt out of receiving Child Benefit altogether, although the deadline for informing HMRC expired on 7th Januart. You can still voluntarily de-register, but must repay any benefits after this date.

Thousands to enter self-assessment process

One of the most controversial side effects of making such a sweeping change to a universal benefit is that taxpayers who fall within its scope will have to repay any benefits they receive after 7th January via the self-assessment system.

A new ‘High Income Child Benefit Charge” will be applied to future years’ self-assessment forms (the first will be in January 2014), and up to half a million employees may have to complete a tax return for the first time.

Rules only apply to taxable income

You should note that the new rules apply to taxable, or ‘net-adjusted’ income in excess of £50,000. Deductions for pension contributions, salary sacrifice, and other arrangements may reduce your pre-tax income considerably

You can find out more about the new rules on the HMRC site.