This week, more than a million families across the UK will receive letters from HM Revenue & Customs telling them that their child benefit is going to be either severed or reduced. Are you going to be one them? And is there anything you can do?
Who will be affected?
The current rules are that all parents and guardians receive child benefit of £20.30 a week for the first child and £13.40 for each child after that.
The new rules, which come into force on 7 January 2013, mean that households in which at least one person earns a salary of more than £50,000 will have their child benefit means tested.
Only the salary of the highest earner will be taken into account. When at least one person earns more than £60,000, child benefit will be cut altogether. When the highest salary is between £50,000 and £60,000, child benefit will be reduced on a scale – for every £100 over £50,000 earned, 1% of child benefit will be deducted.
If you are not sure whether you are going to be affected, you can use the HMRC calculator to check.
What's the controversy?
You might have heard a lot about the changes to child benefit in recent months and the main reason why some people are angry is that eligibility for child benefit is being assessed on individual incomes, rather than on household incomes – and in some cases, this loophole seems somewhat unfair.
For example, in Household 1, only one person works, and they earn £60,000 – so child benefit will be cut completely. But in Household 2, both partners work, and they each earn £49,900 (giving a total of £99,800) – but because neither of them earns more than £50,000 individually, they keep all of their child benefit.
Is there anything I can do?
Although the rules are very cut and dry, if you are just over the threshold, it might be worth noting that the assessment of your earnings is made on your adjusted net income, NOT on your gross salary.
Adjusted net income refers to what you actually take home after various things have been deducted from your salary at source. If you pay £300 into a pension each month, then the annual total of £3,600 will not be included in your salary assessment. This could be a good time to up your pension contributions, if it will make a difference.
There are other ways to reduce your adjusted net income – for example, by paying for childcare vouchers or medical insurance, or leasing a car. All these things must be directly deducted from your salary – it's known as salary sacrifice, and could help to bring your income below the threshold.
What do I need to do if I earn over £50,000?
If you or your partner earns between £50,000 and £60,000, you will need to complete a self-assessment tax return. You will still be paid the child benefit in full for the time being, but anything overpaid to you will be then clawed back via the tax you pay in the future. The HMRC refers to it as the High Income Child Benefit Charge.
If you earn more than £60,000, you can choose to have the child benefit stopped – and this might seem like the simplest option.
However, according to moneysupermarket, experts believe that it would be more sensible to continue to receive child benefit over the year, to complete a tax return, and then pay the money back, because remaining signed up for child benefit can help you build up national insurance credits, which will help to protect your future state pension.
This could be especially important if you are having a break from work to look after children full time. Remaining enrolled might also make it easier to begin receiving child benefit again, should your income drop below the threshold.
What if my income changes?
Obviously, some families might experience a change in income. If you are earning more than £60,000 but there is any chance your income could fall, do keep receiving the child benefit and pay it back later. If your income drops to a level where you can receive child benefit again, you will be able to claim it retrospectively.
If your income increases half way through the year, taking you above £50,000, then the amount you need to pay back will be calculated later when you complete a self assessment tax return.
Does all this apply to me if I am self employed?
Yes it does. However, you won't receive a letter from the HMRC informing you of the changes – only those in the pay as you earn (PAYE) system will receive them. Just as it is already your responsibility as a self employed person to declare your earnings with a self assessment tax return, it will also be your responsibility to pay the extra tax if you earn more than £50,000, to re-pay the child benefit.
What if I'm a single parent, but my ex earns more than £50,000?
You will be allowed to keep all the child benefit, as long as you don't earn more than £50,000 yourself.
Help and advice
It is estimated that approximately half a million people who have never completed a self assessment tax return will now have to do so as a result of the child benefit changes. Let's hope they are ready for the surge of phone calls!
Call: Child Benefit Helpline 0845 302 1444 / Self Assessment Helpline 0800 900 0444
Click: HMRC High Income Child Benefit Charge information
Download: Child Benefit Fact Sheet