Presented by: Boyd Coughlan Accountants Ltd
Investment House,22-26 Celtic Court,Ballmoor,Buckingham,Bucks MK18 1RQ
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As part of the reforms to the welfare system, Child Benefit will be withdrawn from households that include certain higher earners. The charge will come into effect for Child Benefit payments after the 7th January 2013.
The charge referred to as High Income Child Benefit Charge (HICBC) will apply to a taxpayer who has an adjusted net income (ANI) over £50,000 in a tax year where either:
• A person (P) is entitled to an amount in respect of Child Benefit for a week in the tax year and there is no person who is a partner of P throughout the week and has adjusted net income for the year which exceeds that of P; or
• Another person is entitled to an amount in respect of Child Benefit for a week in the tax year, is a partner of P throughout the week and P has an adjusted net income for the year which exceeds that of that other person.
Who is a partner?
A person is a partner of another person at any time if any of the following conditions are met at that time; the persons:
• Are a man and a woman who are married to each other and are neither separated under a court order nor separated in circumstances in which the separation is likely to be permanent;
• Are a man and a woman who are not married to each other but are living together as husband and wife;
• Are two men, or two women, who are civil partners of each other and are neither separated under a court order nor separated in circumstances in which the separation is likely to be permanent;
• Are two men, or two women, who are not civil partners of each other but are living together as if they were civil partners.
The income tax charge will apply at a rate of 1% of the full Child Benefit award for each £100 of income between £50,000 and £60,000. The charge on taxpayers with income above £60,000 will be equal to the amount of the Child Benefit paid. A rounding rule rounds down the result of applying at every stage of the formula to the nearest whole number.
The Child Benefit for two children amounts to £1,752
The taxpayer’s adjusted net income is £57,750
The tax charge is 77% of £1,752 = £1,349
This is calculated as £57,750 – £50,000 = £7,750 / 100 = 77%
For a taxpayer of adjusted net income of £60,000 or above the income tax charge will equal the Child Benefit
An Equitable Charge?
Three couples live next door to each other in Celtic Court. Each has two children under 18:
• At number 22 are Pablo and Doris – Pablo has income of £40,000 and Doris has income of £45,000
• At number 23 are Eddie and Tess – Eddie has income of £55,000 and Tess has income of £30,000
• At number 24 are Russell and Polly – Russell has income of £20,000 and Polly earns £65,000
The impact of the charge on each family will be as follows:
• Number 22 – there is no charge because neither partner has income above £50,000
• Number 23 – Eddie would have a charge on 50% of the Child Benefit received by Tess
• Number 24 – Polly will have a full charge on the Child Benefit she receives.
In most cases Child Benefit is paid to the woman
All households have the same total income of £85,000
Where a couple are living together and have been throughout the tax year the charge will be payable by the partner who has the higher adjusted net income. If neither partner has adjusted net income of over £50,000 there will be no charge. If both have income over the limit the question will be which one has the higher income. Then the fundamental question will be whether or not they actually talk to each other about their income. If they do then it should be possible to establish who should be paying the charge. If they don’t then the possibilities exists that:
• Each will assume that the other will be liable and so neither pay the charge;
• Each will assume they are both liable and both pay the charge.
Will HMRC be able to help out in this situation? They seem to have suggested that their powers of care and management of the tax system will allow them to do so but assurances they have given about taxpayer confidentiality would appear to conflict with this!
If we act for both parties it will be necessary to obtain authority from each to divulge at least the fact that one has higher ANI than the other and should pay the charge.
If able to do so without breaching confidentiality, there may be planning opportunities which can be exploited to ensure that the charge is kept to a minimum or is safely avoided. This will involve considering:
• Respective gross income of the couple – can you plan profit shares / dividends / salary payments to give the optimum balance;
• Claims for relief for losses etc;
• Charitable payments under Gift Aid – who should make them bearing in mind that they are deducted when arriving at ANI;
• Pension contributions paid net of tax – again who should make them given that they are deducted in calculating ANI.
Retrospective adjustment of income
Potentially problems could arise if the income of either partner is adjusted retrospectively and not only does this affect the liability to HICBC but may also changes the person who is liable. This could happen if a claim is made to carry back a relief such as a loss relief as a result of which the ANI of the claimant falls below the ANI of their partner resulting in the partner then incurring the charge. Alternatively, the ANI of an individual could be increased as a result of an HMRC investigation which results in that individual becoming liable for the charge for an earlier year. In that situation, it would seem that HMRC would have to repay the charge paid by the other partner.
Couples starting to live together
As the charge is referenced to a week, the charge will only apply to those weeks of the tax year for which the partnership exists. The income calculation is based on the annual income. Where a couple come together and the Child Benefit is already being paid, the partner with the higher income will only be liable to the charge for those weeks from the date the couple start living together until the end of the tax year, not the income that arises from the date on which they begin to live together.
It will be necessary to establish exactly when the year co-habitation started and look at the ANI of each partner on an annual basis.
If a couple break up, the partner with the highest income will only be liable for the period 6th April to the week in which the break up occurs. Again the liability will be calculated by reference to the annual ANI of each partner which will not be known until the end of the tax year. A partner may end up bearing a charge even though their income in the period when they were living with another was actually lower than theirs.
Child not living with claimant
Under Child Benefit rules a person (R) can claim Child Benefit on the basis that they are not living with the child for which they claim but are contributing to the child’s upkeep.
A charge can arise where neither R, nor R’s partner, is liable to the basic charge and the child for whom R is claiming is living with a person (S). These rules apply the charge to S as if that person had claimed the Child Benefit were S, or S’s partner, and have adjusted net income over £50,000.
There is an exemption if R had previously claimed Child Benefit on the basis that they were living with the child and, after a period of less than 52 weeks, resumed the claim on the same basis. An example could be where a parent moves away temporarily for work purposes and leaves the child with a family member until they return.
More than one person living with the claimant
Where a person (T) is entitled to Child Benefit and there are two or more persons who are their partner throughout the week and each of those persons would each be liable to the charge then only the person with the highest ANI will be liable.
Herein lies the potential to open up a real can of worms! HMRC could allow a double charge to arise or inadvertently trigger a major domestic problem. Please ask for an example if you feel this affects you.
Notification of chargeability
The requirement to notify liability to income and capital gains tax by the 6 October, has been amended to include situations where the person is liable to a High Income Child Benefit Charge (HICBC). The requirement to notify chargeability will not apply where:
• All the income received has been taxed under PAYE;
• All the income has been taxed at source and there is no higher rate liability
• There are no chargeable gains; and
• There is no liability to HICBC.
This could be a problem for an individual who becomes liable to pay HICBC and is an employee with all income taxed by PAYE.
Charge to be coded out
The charge is included in PAYE regulations so that it can be collected through the PAYE scheme unless the taxpayer objects. It is also included in the definition of tax liability, so that it could potentially affect payments on account and balancing payments.
Election not to receive Child Benefit
Child benefit itself is not being made liable to tax and the amount that can be claimed is unaffected by the new charge. It can continue to be paid in full to the claimant even if they or their partner have a liability to the new charge.
Child Benefit claimants will be able to elect not to receive the Child Benefit to which they are entitled if they or their partner do not wish to pay the new charge. An election can only be made if P reasonably expects that, in the absence of the election, P or another person would be liable to a High Income Child Benefit Charge.
An election has effect in relation to payments made for weeks beginning after the election is made but, where entitlement to Child Benefit is backdated, an election may have effect in relation to payments beginning in the period of three months ending immediately before the claim was made.
An election may be revoked and has effect in relation to payments made for weeks beginning after the revocation is made. However, if P makes an election which results in all payments, in respect of Child Benefit, to which P is entitled for one or more weeks in a tax year not being paid and, had no election been made, neither P nor any other person would have been liable to a HICBC in relation to the payments P may revoke the election so far as it relates to the payments no later than two years after the end of the tax year.
It is important to note that the election can only be made if an individual is entitled to Child Benefit which assumes that a claim in the first place. Then, although they will not incur any liability to HICBC, they will also lose entitlement to any NI credits as a carer which could affect entitlement to old age pension.