What is Child Benefit?
Child benefit is available to help those responsible for one or more children under the age of 16 (or 20 for those that stay in approved education or training). There’s no limit to how many children you can claim for, but only one person can claim the benefit.
Child benefit is designed to help with the costs associated with parenthood The current amount payable is £20.70 a week for the eldest child (£1,076.40 pa) and £13.70 per child after that (£712.40 pa).
You don’t have to claim the benefit, however, even if you are eligible and choose not to claim, it’s still best to fill in the form as importantly you will gain National Insurance credits for state pension and it ensures that your child will also get a NI number when they reach the age of sixteen
What is the High Income Child Benefit Charge (HICBC)?
From the 7th January 2013, if you or your partner’s individual income is over £50,000, then you may have to pay a tax charge on your child benefit payments. The definition of partner includes those married, in civil partnerships or couples living together as if they were married or civil partners.
To work out if your income is over the threshold, you will need to work out your ‘adjusted net income’ (ANI). Your ANI is your total taxable income before any personal allowances and less things such as Gift Aid.
For those affected by the HICBC, the charge is 1% of the total benefit for every £100 of ANI over £50,000. So, by definition, the charge applies between £50,000 to £60,000, as the charge at £60,000 is 100% of the benefit.
The charge applies to the partner with the highest ANI, regardless of who actually receives the child benefit payment. The amount of the charge will then be collected through self-assessment or PAYE and there are also penalties for late repayments.
How can you plan for HICBC?
There are a variety of circumstances that can create a liability to the HICBC, with the most common being due to salary. A simple way to mitigate this is with a pension contribution which will reduce your ANI. The tax relief you can obtain can be much higher than the marginal rate of 40% where Child Benefit is restored.
If you can control your income, for example if you are the owner of a limited company, then you may be able to restructure your remuneration in a tax efficient manner. Perhaps your partner is also a shareholder in the company and maybe increasing their income, and/or dividends, could mitigate this charge.
Whilst dividend income is taxed differently, it still counts towards ANI. If dividends are likely to create a liability to the HICBC, it could be time to restructure the investment, either putting it in a wrapper, or changing the wrapper. For example, transferring shares or unit trusts into an ISA. In addition to reducing the HICBC, dividends paid within an ISA are not assessed against the dividend allowance of £2,000, therefore there would be less tax to pay.
Get in touch to find out more about your options
If you’re subject to the HICBC charge, there are a variety of solutions that our expert advisors will be able to discuss with you. For more information or to book an appointment, please call us on 01772 729742 or complete our online enquiry form.