CHANGES TO CHILD BENEFIT
From 7 January 2013 universal entitlement to child benefit will cease. Couples receiving child benefit will see their entitlement reduced if one of them has taxable income in excess of £50,000 per annum. If one of them has taxable income in excess of £60,000 per annum they will lose the whole of their entitlement.
The new rules are a watered down version of what was originally proposed in the 2012 budget. Had those proposals gone ahead then child benefit would have been withdrawn entirely if either partner was a higher rate tax payer. The proposed rules were seen as unfair because a £1 increase in income would have resulted in a total loss of child benefit of at least £1,000. A second criticism was that the proposed rules favoured families where both partners worked earning say £30,000 each when compared to a family where just one partner worked but earned £45,000.
Under the new rules, the higher earning partner will face an additional tax charge equivalent to 1% of child benefit received for every £100 they have in gross taxable income above £50,000. The tax charge can be avoided by stopping a child benefit claim.
The new rules do not just affect married couples or partners who have had children together. If for example a single man starts living with a divorced woman with two children and his income exceeds £60,000 per annum, he will face an additional tax liability equal to the child benefit his partner received if he contributes at least that amount towards the children’s upkeep.
A partner is defined as:
(a) a person you are married to and you are living with during the tax year;
(b) a civil partner you are living with during the tax year; or
(c) a person you are living with during the tax year as if you are married or civil partners.
A person ceases to be a partner if you permanently separate during the tax year.
Some of the problems thrown up by these new rules are discussed below:
- Partners will need to disclose their taxable incomes to each other. This is because the partner with the higher income is responsible for the tax charge.
- More individuals will have to complete self assessment returns each year. This is because the highest earning partner in a family claiming child benefit will have to pay the additional charge and HMRC can only really assess this accurately by requiring a self assessment return to be completed.
- It is rarely straightforward to determine the precise point where two people are living together as husband and wife or civil partners.
The new rules also bring with them a hidden trap for the unwary. This is best illustrated with a fictional example.
John aged 35, has been married to Anne aged 30 for 5 years and they are expecting their first child in June. Anne has worked as a secretary for eight years and John qualified as a solicitor ten years ago and is now employed by a bank on a salary of £70,000. Anne has decided that she would like to be a full time mother and will stop working at the end of March. John and Anne hope to have at least one more child, but would like a gap of about five years.
John and Anne decided it would be easiest to stop claiming child benefit altogether. John concluded that this is preferable to making a large single tax payment each year, and he is particularly loathed to file a self assessment tax return each year or, worse, to pay an accountant to do this.
John and Anne have made a costly mistake. If Anne was in receipt of child benefit, she would receive credits to her National Insurance contribution record until her youngest child was 12. At this point she may well have built up an entitlement to over 80% of the basic state pension without even returning to work. But having decided not to claim, if she never returns to work, she probably won’t have enough contributions for any state pension in her own right.