If you or your partner is entitled to receive Child Benefit you may be affected by the new High Income Child Benefit Charge (HICBC) which was introduced in the 2012 Finance Act and which comes into effect on 7 January 2013.

Child benefit is generally paid to the mother; however if either her income or her partner’s income exceeds £50,000, the HICBC will be payable by the one with the higher income.

No HICBC will be payable where both partners’ income is below £50,000.

For the purposes of the HICBC, two people are “partners” if they are married, in a civil partnership or cohabiting as a couple; if a couple is separated either under a formal separation or in circumstances which are likely to be permanent then they cease to be partners.

The HIBC is calculated as follows. Where the taxpayer’s income is between £50,000 and £60,000, then the HICBC is 1% of the amount of child benefit to which the taxpayer (or partner) is entitled to in the tax year for every £100 of income over £50,000. If the taxpayer’s income is greater than £60,000, then the tax charge will equal the amount of the child benefit.

Examples:

A taxpayer has income of £54,000; his partner is entitled to child benefit of £1,752.

£54,000 exceeds £50,000 by £4,000.

The HICBC is 1% for every £100 that income exceeds the threshold i.e. 40%.

The HICBC is 40% of £1,752 i.e. £700.

A taxpayer has income of £60,000; his partner is entitled to child benefit of £1,752.

£60,000 exceeds £50,000 by £10,000.

The HICBC is 1% for every £100 that income exceeds the threshold i.e. 100%.

The HICBC is 100% of £1,752 i.e. £1,752.

Since the charge is only being introduced in January 2013, the HICBC for the current tax year (2012/13) will only be payable on the amount of child benefit for the period 7 January – 5 April 2013.

The HICBC will be payable as part of the individual’s total income tax liability, on 31 January after the end of the tax year in question.

The HICBC is based on the amount of child benefit a claimant is entitled to receive – whether or not that amount is actually received – so in order to avoid the charge a claimant can elect to “disclaim” entitlement to child benefit. .Once entitlement to child benefit ceases, the HICBC no longer applies, so the partners with the higher income will no longer have to file a tax return to pay the charge.

Making the election may therefore be convenient if one or both partners’ income is over £60,000, so that without the election the full amount of child benefit received would simply be repayable as HICBC; however, if the individuals’ circumstances change, such that their income falls, the disclaimer can be revoked so that entitlement to child benefit is restored. The revocation can be backdated by up to two years in certain circumstances.

However, claimants should think carefully before making the election to disclaim child benefit if the following circumstances apply. An individual needs sufficient “qualifying years” of national insurance contributions to qualify for the full state pension. A mother who does not work but stays at home to look after children is eligible for credits towards her NIC history under Home Responsibilities Protection. However one of the conditions to qualify for HRP is that the woman is claiming child benefit. According disclaiming child benefit could affect a woman’s entitlement to HRP and thus reduce her eventual state pension.

The introduction of the HICBC is creating many headaches, both for taxpayers and for the taxman. Many taxpayers who have previously not had to complete a tax return will now be brought into the Self Assessment system as they will have to complete a tax return in order to pay the HICBC, creating an extra burden of work for the individuals and for HMRC.

Since the HICBC is payable by the partner with the higher income, for some taxpayers, this may create issues regarding privacy, when determining which partner has the higher income – it is over 20 years since independent taxation was introduced so concerns have been raised that partners will no longer be able to keep their affairs confidential. While for many this will not be an issue, it is not hard to envisage situations where problems could arise.

At this stage, the new system poses many potential problems and it will be interesting to see how HMRC deal with and police the new regime.

Disclaimer

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene (Incorporating Modiplus+). He can be contacted on 020 7383 3200 or umesh.modi@silverlevene.co.uk