Child Benefit - The Sting

The Benefit 

Child Benefit is a tax free, non means tested benefit. You are eligible for Child Benefit if you are responsible for raising a child who is under 16, or under 20 and in approved education or training. You can claim it as soon as you have registered the birth of your child or they come to live with you, and the amount you receive for the eldest or an only child is £20.70 per week (based on current year rates), and then £13.70 per week for each child thereafter.  

Once you register for Child Benefit, you will qualify for National Insurance credits towards your State Pension if you are not working or earn less than £166 per week, and your child will automatically be issued with their National Insurance number when they reach 16.

How to Claim

To claim Child Benefit, you need to fill in a Child Benefit claim form (CH2) and this can take up to 12 weeks to process. Two people cannot claim for the same child and it is important to note that Child Benefit can only be backdated by 3 months..

The Sting

In earlier years everybody could take advantage of Child Benefit regardless of their income. However, an effective means-test was introduced on 7 January 2013 meaning the amount paid to households with high earners would be restricted and clawed back by HMRC as a tax charge from the highest earner. This is known as the High Income Child Benefit Charge (HICBC).

Unfortunately these rules state that If the claimant or their partner are in receipt of Child Benefit and if either have net income in excess of £50,099, the highest earner will need to repay some or all of the Child Benefit back to HMRC as a tax charge in their Tax Return. The HICBC claws back 1% of the amount received for every £100 of income on a sliding scale between £50,000 and £60,000.

This means that if you earn in excess of £60,000 the full amount of any Child Benefit received will end up being paid back. It is therefore important to clarify who is the highest earner in your household and if this is you then the charge would go on your own Tax Return, but if this was your partner it would go on theirs. It is worth noting that the definition of partner would include those who are married, in a civil partnership or couples living together as if they were married or civil partners.

Although this is relatively old news, it is surprising how few people know about this and HMRC will enquire into a taxpayer’s affairs if this comes to their attention as they do receive the information direct from the Child Benefit Office. Usually HMRC will just raise this as a single enquiry and compare their information to what is on your Tax Return. In most cases HMRC will not be punitive about this if it is a first time ’offence’. HMRC will mostly be reasonable provided this is a first instance, the rest of your taxes are correct and you take reasonable care. 

For those who already know that they or their partner are definitely earning over £60,000 they may think it is pointless even claiming the Child Benefit. Even if you know one of you does not qualify to receive it, you should still register for it but just opt not to receive payments, as this will ensure your National Insurance contribution record is continuous and don’t forget the credits will count towards your State Pension. This is particularly relevant if one of you stays at home and is not working, or working with minimal pay.

If both partners have income of over £60,000 and this will continue to apply, it is still worth registering at birth, but then disclaiming it, rather than having to repay it each year via the Tax Return, in case your circumstances should later change. If there is just a single parent household, then you would just look at the income for that person only.

Notifying HMRC if you haven’t filed a Tax Return

If you or your partner were liable to the HICBC in prior tax years, but have not filed personal Tax Returns you can notify HMRC by making a voluntary disclosure. This will most likely mitigate the penalties for failure to notify which can be up to a maximum of 100% of the unpaid tax.  Ignorance of the charge is not a reasonable excuse. You can authorise your accountant to liaise with HMRC on your behalf, and once they have been authorised, they will be able to contact the Child Benefit Office to confirm the Child Benefit payments received and can notify them if payments need to stop or restart, and then discuss issues in relation to failure to notify penalties and the mitigation thereof.

Tax Planning

If you are the higher earner in your household and your income is teetering around the £50,000 level, there may be ways you can ensure you retain your Child Benefit. The Child Benefit charge is calculated based on your adjusted net income, which is your total taxable income before personal allowance and less Gift Aid and pension contributions.

There are planning options you can consider with respect to regulating your income if you are a company owner. For example, you could regulate your personal income so you withdraw up to £50,000 if you have a continual income stream, or if your income is volatile and fluctuates you could maximise your drawings in one year and then cap your drawings in the following years so only one year is affected. This ensures Child Benefit is retained in intervening tax years.

Additionally, you could make pension contributions and/or charitable donations to reduce your adjusted net income to £50,000. Any pension contributions made by an individual whether to an occupational or personal pension will reduce adjusted net income. Some employers may even match the additional contributions. For instance;

An individual with taxable income of £55,000 whose household receives Child Benefit of £1,076 for one child could make a pension contribution of £4,000. This would be grossed up by the basic rate of tax to £5,000 and reduce the adjusted net income to £50,000. They would thereby avoid an HICBC tax charge of £538 and benefit from higher rate tax relief of £1,000 on the pension contribution claimed through their Tax Return. Therefore, the gross pension contribution of £5,000 has a net cost of £2,462 to the taxpayer.

You could also negotiate any pay rises to increase pension contributions or utilise salary sacrifice schemes to receive tax exempt benefits, such as additional pension contributions or the cycle to work scheme. You could also potentially transfer income producing assets to the lowest earner to reduce your income and preserve Child Benefit entitlement.

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