- What is the high income child benefit charge?
- Who has to pay the high income child benefit charge?
- What happens if I don’t pay the high income child benefit charge?
- Why is the high income child benefit charge so unpopular?
- Should I opt out of receiving child benefit?
- How to beat the high income child benefit tax charge
This month marks the 10th anniversary of the introduction of the high income child benefit charge’, which claws back child benefit payments when a parent or partner earns above £50,000.
Introduced by David Cameron and George Osborne in January 2013, the charge has become one of the most-hated taxes, with experts saying it seems like it was designed to trip people up.
Experts argue that it is confusing and illogical, and is now catching out many middle-income families, rather than the high earners it was originally aimed at.
The government has raked in billions of pounds from the charge, and HMRC carries thousands of checks every year to make sure families are paying the tax. In 2021-22, it made 43,995 compliance checks on parents; many would have been unaware they were supposed to pay the charge.
Sean McCann, chartered financial planner at NFU Mutual, comments: “Despite being a decade old, many families are unaware they need to pay the tax charge once the income of the highest earner exceeds £50,000. As wages increase with rising inflation, more families will find themselves liable to pay.”
We explain how the tax charge works, who needs to pay it, why it is so unpopular - and how you could potentially avoid it.
What is the high income child benefit charge?
Child benefit used to be a universal payment, available to all families with children. However, that changed in January 2013 when the coalition government brought in the high income child benefit charge.
As the name suggests, it’s a charge on families with a high income. The ceiling was set at £50,000 a year, so if a parent or their partner earned more than that amount they would need to pay some or all of the child benefit back.
The amount of child benefit you can receive is cut by 1% for every £100 of salary above the £50,000 ceiling.
Once you earn £60,000, all of the child benefit is clawed back, and you’re left with nothing.
This money is repaid via the high income child benefit tax charge. The onus is on families to pay it by filling out a self-assessment tax return. Alternatively, they could opt out of receiving child benefit in the first place.
Who has to pay the high income child benefit charge?
If you receive child benefit and have an individual annual income of £50,000 or more, you’ll need to pay the tax charge. If you don’t earn above this level, but your partner does, they will need to pay the charge.
Whoever has the higher income is responsible for paying the tax charge via their self-assessment tax return.
HMRC defines ‘partner’ as someone you’re married to, in a civil partnership with or living with as if you were. It doesn’t matter if the child living with you is not your own child: if someone in the household claims child benefit, and you’re the highest earner, with an income of above £50,000 a year, you’ll need to pay the tax charge.
McCann comments: “Someone moving in with a new partner who receives child benefit could find themselves liable for the tax.
“Those who need to pay the charge must submit a self-assessment tax return each tax year, even if they are employed and normally pay their tax through PAYE,” he adds.
“With the self-assessment tax return deadline looming at the end of January it’s worth checking now if you need to pay it.”
What happens if I don’t pay the high income child benefit charge?
Families who are supposed to pay the high income child benefit charge but haven’t done so may get a letter from HMRC. These compliance checks are carried out on individuals who either did not register for self-assessment to pay the charge, or paid the incorrect amount on their self-assessment tax return.
However, McCann cautions: “Families who haven’t received reminder letters shouldn’t assume the tax isn’t owed. If you have income over £50,000 and receive child benefit or live with a partner who does, the onus is on you to inform HMRC and pay any tax due.”
Those who fail to notify HMRC that they should pay the tax could receive fines of up to 30% on top of what they owe. There could be interest to pay as well.
According to official figures, nearly half a million parents have faced fines since the child benefit charge was introduced 10 years ago. Around 440,578 fines were issued by HMRC between 2013 and 2022.
Nimesh Shah, chief executive of the accountants Blick Rothenberg, is a vocal critic of the tax charge.
The #tax has been a complete misnomer since its introduction in 2013 – it is illogical and the mechanism to collect the charge through #selfassessment almost feels like it was designed to trip people up. In fact, over 440k fines have been issued by @HMRCgovuk7/10January 7, 2023
Shah calls it “an unhappy 10-year birthday for the high income child benefit charge”, and says the charge has “dragged thousands of people into having to file a tax return, while hundreds of thousands have received penalties from HMRC for failing to disclose a tax they knew nothing about”.
Some parents have tried to appeal the fines, while one family took HMRC to court last year over a £4,200 tax demand for child benefit paid between 2014 and 2017 for their two sons.
Jason and Samantha Wilkes took their case to two tax tribunals, with the judge ruling that HMRC’s demands had been unlawful. HMRC appealed, but the Wilkes’ victory was upheld at the Court of Appeal last month and so they will not have to pay anything back.
However, other families hoping to rely on this outcome will not be able to, as the government changed the law to give it retrospective legal authority to issue high income child benefit charge demands dating back to 2013.
Why is the high income child benefit charge so unpopular?
According to Shah, the high income child benefit charge should never have been a tax.
He tells The Money Edit: “The government decided 10 years ago that the clawback of child benefit payments should take the form of a tax. At the time, lots of people expressed concern, and 10 years on, just as many people are being caught out and left feeling very confused and anxious when they receive an enquiry or worse a fine for something they knew nothing about.”
Critics say communication and publicity from the government about the tax charge has been poor.
Shah comments: “I have had friends that have tripped up over the high income child benefit charge and come to me to ask how they can resolve the issue. There isn’t a magic wand with HMRC and the examples I’ve seen have ended with the person having to pay the tax. One person tweeted me saying they had to repay £7,000 and it has set their family back years.”
McCann says he has seen cases where families have been hit with five-figure tax bills.
Even when families are aware of the tax, McCann notes that issues can arise when couples don’t know details of each other’s income meaning they don’t know who is liable for the tax, “each assuming the other is responsible for and paying the tax”.
The income limit can also seem unfair. It penalises single parents and households with one high income earner because it is based on individual, rather than family income. So, a couple earning £49,500 a year each (£99,000 in total) can keep all their child benefit while a single parent earning £60,000 gets nothing.
The £50,000 level is also arguably unfair because it has remained frozen for a decade. Had it been increased in line with inflation, it would now be £64,300.
McCann says: “The tax was originally designed to catch ‘high earners’. The frozen threshold means more and more families are being dragged into the net every year as incomes rise.”
About 373,000 families pay the tax charge, while a further 624,000 families have opted out of receiving child benefit.
Between 2013 and 2020, the high-income child benefit charge raised £2.83bn for HMRC. It has saved the government an estimated £6.1bn on top of that from families opting out of receiving child benefit.
Should I opt out of receiving child benefit?
The easiest thing to do for many families where one person earns above £60,000 is to simply opt out of child benefit. That way you don’t need to register for self-assessment, worry about filing a tax return each year, or pay the tax charge.
However, if you opt out, you should still fill in the child benefit claim form, and state that you do not want to get payments.
That way you will still get National Insurance credits, which count towards your state pension, and your child will receive a National Insurance number without them having to apply for one.
Bear in mind that for those earning between £50,000 and £60,000 a year, you shouldn’t opt out as the tax charge only claws back part of the child benefit, not all of it.
How to beat the high income child benefit tax charge
If you suddenly realise you should have paid the tax charge in previous years, the best advice is to be proactive and honest.
McCann explains: “Where tax is owed, HMRC generally takes a more sympathetic view when the taxpayer acknowledges their mistake and contacts them. Waiting for HMRC to contact you could potentially result in a bigger bill.”
In terms of avoiding the high-income child benefit tax charge in future, a potential solution for some families is to put more money into their pension.
The child benefit tax is based on your level of income after pension contributions, so lowering your income through pension contributions can be a useful way of reducing or eliminating the tax charge.
For example, someone earning £60,000 who pays £8,000 into a personal pension would see another £2,000 added via tax relief giving a total pension contribution of £10,000. This would reduce their earnings to £50,000 meaning they wouldn’t be liable for the high-income child benefit tax charge.
If you’re an employee, you could also take part in salary sacrifice schemes, such as cycle to work or a gym membership, which would reduce your salary and potentially lower or remove the tax charge.
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Ruth Emery is contributing editor at The Money Edit. Ruth is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times. A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service. Outside of work, she is a mum to two young children, a magistrate and an NHS volunteer.
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