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Contributed by ACCA

It is estimated that the new tax charge will bring an additional 500,000 taxpayers into the self-assessment system. Many of those affected are probably unaware that they will be required to complete a self assessment tax return form each year.

The new tax is an income tax charge to ensure that child benefit is progressively removed from persons with adjusted net income (see below) in excess of £50,000. It only applies if one person in a household partnership has an annual adjusted income in excess of £50,000.

Adjusted net income

Adjusted net income is defined in Section 58, Income Tax Act 2007. It is net income after deduction of gift aid (grossed up), pension scheme contributions and losses etc. It will therefore include dividends, income from property including holiday homes, interest on savings, pensions as well as self-employment and casual work. The self-employed should bear in mind when preparing their accounts that they need to make use of all available deductions, such as capital allowances, and maximise their pension contributions if necessary.

The new charge also means that in many cases spouses, civil partners and co-habitees who are responsible for a child will be forced to share income details with each other. Not only does this fly in the face of independent taxation of husband and wife, which was introduced in 1990, but it also extends to individuals who are not married. Many couples who have previously preferred not to share details of their income details, for whatever reason, will no longer be afforded such privacy. The legislation requires that it is the higher earner who will be required to pay the tax charge and this will require a degree of exchange of information between the parties.

Opting out of receiving child benefit

As a reminder, if a partner’s income is in excess of £60,000, it may be preferable to disclaim the benefit in order to avoid the charge. This election takes effect in relation to weeks beginning after the election is made.

The way that the charge works is that the child benefit is effectively clawed back by way of the high income child benefit tax charge once the higher-income partner’s income exceeds £50,000. Once income hits £60,000, the full child benefit is effectively withdrawn via the tax charge. Families with one parent earning more than £50,000 will lose part of the benefit. It will be fully withdrawn where one parent earns above £60,000. However, unless parents opt out of receiving it, the higher earner will still get the benefit and will have to pay it back later.

When to opt out

Approximately 200,000 people opted out of receiving child benefit, in advance of the commencement of the charge on 7 January 2013. Elections not to receive child benefit for higher rate tax payers will need to be considered soon for the 2013/14 tax year.

Families with one member earning more than £60,000 should certainly consider opting out of receiving the child benefit, otherwise they will face:

  • full clawback of the child benefit by way of a tax charge
  • the prospect of being brought within self-assessment.

Additionally, families with one member with income approaching the £60,000 mark may also wish to consider opting out of receiving the child benefit, to avoid a future tax charge and the burden of having to complete a self assessment tax return.

It is the benefit claimant who must disclaim the tax charge and not the affected taxpayer. This raises potential for conflict between partners, for example, if the claimant wishes to continue receiving the benefit but the high income partner wishes to avoids a tax charge and self assessment.

Opting out

In CBTM03120 – Payments: High Income Child Benefit Charge election HMRC states that ‘A person’s election will take effect once it is treated as made that is, both after Her Majesty’s Revenue & Customs receive it and

  • on the Monday after a person’s most recent Child Benefit payment; or
  • where a person’s Child Benefit payment has already been issued, the Monday after the week(s) this payment relates to; or
  • on the day a person requests if later than either Monday’.

It provides the following example:

A person is paid child benefit 4-weekly, three weeks in arrears and one week in advance. Where a payment is due for the period 6 May 2013 – 2 June 2013, the date a person’s election takes effect depends on when HMRC receive that election. If the election is received on:

  • 14 May 2013, the election will take effect from 6 May 2013
  • 28 May 2013, the person will already have received their child benefit payment for the period up to 2 June 2013 and so their election will take effect from 3 June 2013
  • 24 May 2013, although the payment for the period up to 2 June 2013 will not have been paid into the person’s account, it will have already been issued and so the election will take effect from 3 June 2013. 

If you provide advice on this area to your clients you should review existing engagement letters and consider amending the letters to include where you provide services to a couple. 

How to opt out

Opting out is achieved via submission of an online form.

For further information on the high income benefit charge, please see our ACCA Technical Factsheet 178.