It is estimated that only around 200,000 people have opted out of receiving child benefit since the government announced the new rules.
This probably leaves around one million people who are very likely to be hit by the 'high income child benefit charge'.
As the vast majority of our clients earn well in excess of the earnings figures discussed below, this is an issue that will affect many, and perhaps making an informed choice now can make matters simpler.
So what are these new rules and should you take action to opt out of receiving child benefit?
From When Does It Apply?
- New rules came into force on 7th January 2013 and any benefits received after this date will be taxed according to the new rules, see below
Who Is Affected?
- An individual, or their partner, who earn over £50k in a given tax year and who are receiving Child Benefit
- A tax rate of 1% for each £100 of income applies for those who earn between £50,000 and £60,000 pa
- anyone who earns over £60,000 will be charged an equal amount to the amount they receive as Child Benefit
How Do The Government Clawback This Benefit?
- Through income tax, although HMRC cannot claim monies until your exact earnings are known
- So it is likely that the earliest the tax will apply will be January 2014 through self-assessment & PAYE
- In later years tax codes could be adjusted for higher earners so that on PAYE it is clawed back monthly
Can This Tax Be Avoided?
- There are limited options here, but as your income level is calculated by assessing your gross income less any allowable deductions, then gifts to charity and pension contributions could be used to reduce the assessable income
- For those earning between £50,000 and £60,000, the new tax charge would be less than the full-child benefit received, so the household would, be better off if the child benefit claimant continues to receive it and the higher income partner pays the tax charge. Crucially, women still need to register for child benefit and then opt out to receive national insurance credits towards their state pension.
Should I Opt Out?
- It is perhaps not a decision to be taken lightly as it means that a couple with, say, two children would not receive the £146 per month due
- However, if earnings for one in the household is well above £60,000 pa, and they have no intention of gifting large amounts to charity or investing in a pension, then it does make sense to opt out if for no other reason than it makes your tax affairs simpler and could even avoid running the risk of a fine for getting it wrong
How Do You Opt Out?
- If you were extremely efficient and opted out by 7th January, then well done and no action needs to be taken other than to check that HMRC cancels your Child Benefit
- If you decide that this is your best course of action then you need to submit a declaration to the Child Benefit Office, which needs to be completed by the person who receives the benefit, usually the mother
The Financial Tips Bottom Line
Take the time to work out if you are affected by this new rule. If you are, then decide what you need to do and take action if necessary.
If you want to opt out, contact the Child Benefit Office as soon as possible to make your tax affairs as simple as you can.