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Child Benefit Changes Could Cause Considerable Complications

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In ten weeks' time there will be a major change to the child benefit system - and very few people know about it. Some families who currently receive child benefit and have someone who earns over £50,000, will be getting a letter from HMRC outlining what is going to happen. But not all will get a letter because HMRC won't necessarily know where people are just living together and aren't married, that there is any connection between them.

Government announced that child benefit will be withdrawn gradually from those where one parent or partner earns more than £50,000 and withdrawn entirely from those families where someone earns more than £60,000 a year. The options available to the family will be either to withdraw from child benefit completely or pay it back later as a high income child benefit charge. The problem is that the person in the family who claims the child benefit may not be the one who later has to pay the charge.

Many people do not know about this new rule and it is going to cause confusion. Recipients of the benefit will have to talk to their partner about how all this could affect the family's finances. Some people do not know how much their partner is earning, nor who earns the most. Some may even be better off paying into a pension scheme to bring down their total income in order to avoid the clawback.

The letter from HMRC asks how much 'individual income' a recipient of the benefit or their partner may earn. This is not just salary. Dividends, income from rental properties including holiday homes, self employed earnings, interest on savings and pensions all need to be taken into consideration. Even Gift Aid payments made to charities or pension contributions will need to be factored in as they can be deducted when determining the final figure.

It will especially difficult for those who do contract work and have forthcoming projects affecting income to estimate their income for the year. They may even want to think about stopping claiming child benefit initially and could later decide to opt back in.

We may also see problems for those partners who do not or cannot discuss their respective incomes with each other - this is more common than you may think. HMRC has said that they will try to help. It will aim to provide the minimum amount of information necessary for someone to establish whether they or their partner has the higher income. There is a danger though that this information may be out of date so I would urge people to ask what it is based on when speaking to HMRC. They may even need to call back at a later date after their partner has filed a more recent tax return.

If the couple decide to ask HMRC to stop their child benefit payments, the easiest way is probably to fill in the online form on the HMRC website. This has to be done by the person who currently claims child benefit, not their partner.

All taxpayers affected by the charge will need to declare their liability through self assessment. HMRC estimates that up to 500,000 taxpayers who do not currently complete a self assessment return will be liable and have to complete a tax return adding a larger burden to an already under resourced system. These people will need to ask HMRC to send them a tax return. Families will need to start collecting paperwork together ready to file a paper return by October 2013, or file online by 31 January 2014.

There is no doubt that the charge will increase complexity and compliance costs. ICAEW is worried we are going to see the same operational problems arising that we saw for tax credits - especially for those with fluctuating incomes. We want a simplified tax system that is as clear and efficient as possible. However as you can see from the issues raised, this charge will add considerable complications. The countdown is on for 7 January 2013.