Child benefit shake-up – will you be affected?

From 7th January 2013, Child Benefit (CB) will be means tested for the first time. HMRC are sending out letters to taxpayers over the coming weeks. So, how will you be affected?

Leading accountants, PKF, say that millions of current CB claimants who are paid via the PAYE system will soon receive letters asking if they would like to ‘opt out’ of receiving the benefit altogether. Those who continue to claim will lose their eligibility to claim CB where their annual income is £50,000 or more. The benefit will be eroded by 1% for every £100 received after this threshold, so the entire benefit will no longer be payable for individuals with an annual income of £60,000 or more.

The value of CB which is no longer payable will be clawed back by the Treasury via the self assessment system, or by altering the individual’s tax code.

The Coalition’s plans to reform the Child Benefit system have been controversial – especially as the value of the benefit takes into account the annual income of the claimant’s partner. The claw back will apply to the partner who earns the most via a ‘high income child benefit charge’. So, if the claimant currently earns £30,000 and the partner earns £70,000 – the claw back will be made from the partner’s earnings, not the claimants.

Most controversial of all is the anomaly created by the joint vs. individual income thresholds.

If just one partner earns over £50,000, then the value of CB is reduced gradually to zero when income reaches £60,000. However, if both partners earn £49,999 each, then they can keep the entire benefit!

Andrew Penman, Director of Personal Tax at PKF, says that in many cases it may be easier to opt out of CB for the time being, rather than “risk errors arising through a tax code adjustment.” However, this isn’t necessarily the right decision for everyone, as there are National Insurance implications for partners who have given up work to look after children.

“There may be a number of options for reducing taxable income to make the anomalies in the rules work in your favour. These include making pension contributions, using a salary sacrifice arrangement if offered by your employer, transferring income producing assets and even getting your parents to make pension contributions on your behalf. But it is important to take special advice to make sure your plans are cost-efficient.”

Controversially, HMRC is only sending out initial letters to those who are currently paid £50,000 per year via the PAYE system. Therefore, many self employed people will receive no direct information about the changes!

You can find out more on the HMRC website.

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