You may have heard of the controversial tax rule which reduces the amount of child benefit you are entitled to keep if you (or your partner) earns above £50,000 each year.
Here, James Foster, Senior Commercial Manager at SJD Accountancy, discusses how the High-Income Child Benefit Charge (HICBC) works in practice.
What is the HICBC?
The HICBC is a tax charge in place for higher earners, which returns child benefit claimed by the claimant or their partner if at least one of them earns £50,000 per annum or more.
Controversially, if both partners earn £49,999 per year, the HICBC does not apply. But, if one partner earns £60,000, and the other is not earning, then all of the couple’s child benefits will be clawed back via the self-assessment process.
It has also been criticised as it has forced thousands of people to register for self-assessment for the first time, purely to account for the charge.
Child Benefit for 2023/24 currently stands at £24.00 for your first child, then £15.90 a week for any additional children.
So, if you have two children, your total child benefit claim would be £2,074.80 per year.
However, there are some restrictions on this, which is explained below:
What happens if I earn over £50,000?
Ultimately, if you are receiving Child Benefit and either you or your partner earn more than £50,000 (before tax), then you will be required to pay some, if not all, of this benefit back.
What if my income has recently increased, but I am still being paid my Child Benefit?
In this case, your Child Benefit would still be paid monthly, however, once one of you earns above the threshold, you will be then required to include this in your Self-Assessment tax return, paying back a portion of this benefit via income tax. If you haven’t previously completed a tax return, you will then need to register and complete one each year.
How does this impact my tax return?
In your tax return, you would need to pay additional income tax to cover a portion of the Child Benefit you received. This amount is based on how much you earn above the £50,000 threshold, up to £60,000.
For example, if you earn £55,000, you will need to pay back 50% of the Child Benefit (i.e. so it’s 1% for every £100 you earn over £50,000), right up to 100% if you earned £60,000 or more.
Using the above example, where a two-child family is claiming £2,074.80 and one partner earned £52,000 in the tax year while the other earned nothing, they would need to pay an additional tax of £414.96 (i.e. 20% of £2,074.80).
If both of you earned above £50,000, then the higher earner is responsible for recording the Child Benefit in their tax return and paying the income tax. This remains the case regardless of which partner receives the benefit.
You can decide to stop receiving your Child Benefit if you wish, in which case you wouldn’t need to complete a tax return or pay any additional tax. However, if your income was between £50,000 – £60,000, you would be worse off as there would be a percentage of Child Benefit that you don’t need to pay back.
The High-Income Child Benefit Charge is based on your adjusted net income, which is your total taxable income (i.e. your salary including any benefits), minus outgoings such as pension contributions and charity donations.
A popular way that people can go about reducing their adjusted net income and reducing their Child Benefit Charge is by contributing to a pension, which also helps them save for retirement.