How will the new Child Benefit eligibility rules affect IT contractors?

Many contractors will be affected by the new Child Benefit eligibility rules which come into force today. The new rules include a controversial anomaly that may come back and haunt the Coalition.

Since 1946, child benefit has been a universal benefit. It is currently paid to parents at a rate of £20.30 per week for the eldest child, and £13.40 for any other children in the family.

New Child Benefit eligibility rules

From January 2013, the benefit is no longer universal. Instead, higher earners will be subject to a complex (and unfair) system of means-testing.

The benefit makes no distinction between single-income and double-income families; if one partner earns £50,000 or more per year, the benefit will be reduced on a sliding scale to zero when the income reaches £60,000.

However, a family with both parents earning £50,000 each (£100,000 in total), will still be eligible to receive the entire amount of child benefit.

Although the intentions of the Treasury may appear to be ‘worthy’ – the change is set to save £1.5bn per year – the anomaly mentioned above isn’t the only problem with the child benefit changes.

The Coalition also introduced the ‘High Income Child Benefit Charge’, which will reclaim benefits from parents who have not voluntarily waived their right to child benefit altogether. This means that hundreds of thousands of people will have to complete a self-assessment return for the first time in order for the charge to be made.

Many contractors will not have been informed by HMRC in advance of the change to the Child Benefit system, as they will not have been highlighted as earning £50,000 or more via the PAYE system.

Time to speak to your IFA?

Although the weekly amount is not substantial, for contractors with large families, this change could result in a charge of several thousand pounds per year. It could be a good time to discuss your tax planning options with your accountant of IFA to consider whether it is worth transferring assets to your partner, or looking at investing in a pension or other product to reduce your taxable income.

We’re all in it together?

George Osborne wrote an article for the Daily Mail this weekend, in which he revealed that he and his wife told HMRC that they no longer wish to receive the benefit for their two children. The mocking comments which follow the online article will not make comfortable reading for the Chancellor!

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Last updated: 16th June 2019