Child Benefit Rules
From 7 January 2013 there will be a new income tax liability related to Child Benefit.
The new charge is based not on the joint income of the household, but on the income of the highest earner of a couple living together with a child or children. It does not matter whether the couple are married, and who is the natural parent of the children.
To illustrate this:
If you or your partner earn over £60,000 per year you will not be entitled to Child Benefit.
If you or your partner earn over £50,099 per year you will be entitled to a reduced amount of Child Benefit.
If you and your partner both earn under £50,099 per year you will be entitled to the full Child Benefit allowance.
If you earn over £60,000 per year, the child benefit allowance will be withdrawn through an income tax charge. This means you will still be entitled to child benefit, but at the end of the tax year, the highest earner will pay a tax charge equal to 100% of the child benefit you were entitled to.
In this scenario you may opt to officially “disclaim” your child benefit and then the higher earner will not pay the income tax charge, but neither would the household draw the child benefit anymore.
Once you or your partner earn over £50,099 per year, the Child Benefit allowance will reduce by 1% for every £100 earned over this amount.
For example, if you or your partner earn £50,500 per year, you will be paid the full child benefit allowance, and then 5% of this allowance would be claimed back through an income tax charge.
If you and your partner both earn £49,999 or under, for example a joint income of £99,998 – you would be able to receive the full child benefit entitlement.
If however either you or your partner earn over this amount, i.e. £50,099 – £60,000, you would lose some child benefit, and then once the higher earner of this household hits £60,000 – the child benefit is lost altogether.
The person who is liable to pay the income tax charge (ie the person in the household earning over £50,099, or the higher earner of the two if both partners earn more) is also the person responsible for notifying HMRC of their chargeability.
You can elect to stop receiving your Child Benefit to avoid paying it back later but do make sure you are certain your income exceeds the £60,000 or it would be a wasted loss. We do recommend you still claim for Child Benefit when your child is born so that you don’t lose your National Insurance credit, but just elect to stop receiving it later.
If you think this might affect you then please do contact us for further information. There may be ways you can plan your finances to avoid this new tax charge.