How child benefit affects your tax bill
29th November 2016
Bringing up kids is an expensive business, whatever your job is. You're basically signing up for close to 2 decades of hard work and financial strain. The UK government's Child Benefit Scheme is designed to take some of the sting out of raising a family. They'll still break your heart eventually, but they won't necessarily break the bank along with it.
If you do receive Child Benefit and are claiming a tax refund or doing your self assessment tax return with us then make sure to let to know as it can have an impact on your tax bill in a number of ways. New customers tell us that one of the most common problems that n they have suffered when using less experienced accountants is that their Child Benefit was not taken into consideration, resulting in an HMRC enquiry with nothing like the RIFT Guarantee to protect them.
Child Benefit is pretty simple in principle. It doesn't get means tested, so the paperwork's relatively light and you aren't punished for doing well or having savings. Even so, the taxman's still a little less generous if you've got a higher income. It's a strange system, but even if you're making a lot of money, you can still claim Child Benefit. However, you might also get lumped with a tax charge that could easily wipe the whole thing out.
The High Income Child Benefit Charge is a tax that only hammers you if one partner makes over £50,000. Exactly how hard that hammer hits depends on how much money you make. If your income tops £60,000, for instance, the rate is actually 100% - meaning you get nothing. It's basically calculated as 1% of your benefit amount per £100 you make over the £50,000 threshold.
Here's how it works. As long as you and your partner are both making under £50,000 a year, there's no problem. A couple where each is earning £49,999 can still claim their full Child Benefit. However, another couple where one makes £51,000 and the other only £20,000 is in a very different situation. Even though their combined income is way less than the first couple, they get stuck with the High Income Child Benefit Charge.
We know; it sounds crazy, but that's the taxman for you.
A few points to keep in mind:
- You can still be hit with the charge if someone else is claiming Child Benefit for a child living with you. This only happens when the claimant is contributing at least an equal amount toward the child's "upkeep".
- It's the person who's making over £50,000 that gets the tax bill. If both partners are over the threshold, then whoever earns most pays it.
- It doesn't even have to be your child.
With all that in mind, you might be thinking of dropping out of the system and not claiming Child Benefit at all. Don't be in too much of a hurry over that, though. Even if the High Income Child Benefit Charge wipes out your entire benefit payment, it can still be worth claiming. For example, claiming Child Benefit can often entitle you to National Insurance credits that count toward your state pension. It might also help you qualify for things like Guardian's Allowance.
If you're sure you don't want to get hit with a High Income Child Benefit Charge bill, you can choose not to accept the payments. You don't have to drop out of the scheme entirely to do this, meaning your National Insurance credits are protected. You can opt in and out when you need to, if your circumstances change.
Actually paying the charge means getting to grips with HMRC's Self Assessment tax return system. This can be a headache if you aren't already registered and familiar with how it works. You then either pay HMRC directly by the normal Self Assessment deadline, or automatically through PAYE.
The good news, as always, is that RIFT can help. If you need advice about High Income Child Benefit Charge as relates to your tax refund or self assessment get in touch and we can answer any questions you have. HMRC rules are tricky to understand, and it's easy to end up paying too much. Talk to RIFT, and let us put more of your heard-earned cash back in your pocket.