How to Calculate the High Income Child Benefit Charge
Last updated on September 25th, 2019 at 4:36 am
We haven’t looked at this subject for quite a while now, and as it came up in the April CII Advanced Tax and Trusts paper (AF1), we thought it was time for a re-visit.
Prior to January 2013, Child Benefit was paid to every family with children regardless of the level of income that was coming into the household. Although it is still paid to everyone, since 2013 those families classed as having a high income will now have to pay an income tax charge.
An Example of How to Calculate the High Income Child Benefit Charge
Let’s consider an example:
Lisa and Joe are married with two children under 16. Lisa earns £54,000 and Joe earns £26,000. Because Lisa earns over the threshold £50,000, the income tax charge is 1% of the Child Benefit received for every £100 of income she receives over £50,000.
With two children, the benefit they get is £20.70 for the first child and £13.70 for the second; £34.40 x 52 = £1,788
Lisa earns £4,000 over the threshold, so the extra tax is 40% of the Child benefit they receive; worked out as £54,000 – £50,000 = £4,000/100 = 40.
They receive £1,788 per year and effectively have to give back 40% of it, which is £715.
Which income is liable for the charge?
The income of each partner counts rather than the combined income, so if both Lisa and Joe had an income just below the £50,000 limit, they would not have been liable for the charge. (In fact, there is no tax charge if income is below £50,099).
If both of them had earned over £50,000, whichever one had the higher income pays the extra income tax. Once income exceeds £60,000, the charge is equal to the full amount of the Child Benefit, so in these circumstances, a couple can opt out of receiving the benefit.
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What is considered income?
Income is taken to be salary, rental income, savings and any self-employed earnings before any personal allowance is taken off and after deductions such as pension contributions and gift aid contributions are taken into account; this is called ‘adjusted net income’.
How to Pay
Lisa will need to fill in a self-assessment tax return (and register if she hasn’t already), and on this, declare that they were receiving Child Benefit and pay the High Income Child Benefit Charge. She can pay a lump sum through self-assessment or choose to have it deducted through her tax code under PAYE.
How to Reduce the Charge Whilst Still Receiving the Child Benefit
Lisa can avoid the charge and still receive Child Benefit by reducing her taxable income. She can do this by making a pension contribution to reduce her income to below the £50,000 threshold.
The £4,000 pension contribution she would need to pay would just cost her £3,200 once the pension provider re-claims £800 of basic rate tax relief – and she can also make a further claim of £800 through her tax return.
Opting Out Still Requires a Form Completion
If someone chooses not to get Child Benefit payments, HMRC still asks that they fill in the Child Benefit claim form. This ensures that National Insurance is still credited to count towards State pension entitlement.
Grab the resources you need!
If you’re studying for your CII AF1 exam, and you’re wanting to alleviate some exam day anxiety, you’ll need to prepare as much as possible. Grab our free taster to try out one of Brand Financial Training’s resources for yourself. Click the link to download the AF1 calculation workbook taster now!
Over to You…
Did you find this example helpful as you prepare for the CII AF1 exam?
