Caught in a trap with the high income child benefit charge

In 2013 the then chancellor, George Osbourne, announced the introduction of the High Income Child Benefit Charge (HICBC) for those families where one parent has ‘adjusted net income’ of £50,000 plus. Many may not be aware that it is not simply earned income that makes up adjusted net income; other benefits in kind and investment income will also be included. One may be pushed over the threshold unknowingly.

The legislation

Here we look at the main points around the High Income Child Benefit Charge legislation:

Child benefit is currently £24 per week for a first child and £15.90 per week for a second child.

Parents with income of over £60,000 will have to pay a tax charge equivalent to 100% of their child benefit.

This tax charge is not levied through PAYE, but individuals will have to complete a self assessment to report the tax due, meaning thousands may have to complete a tax return for the very first time.

If you think you will be caught by the rules, you can elect not to claim your child benefit in the first instance (careful consideration required dependent on circumstances).

There are plenty of arguments for and against limiting the child benefit and I am not here to pick one side over the other, but many commentators have challenged the fairness of the legislation.

What it means today

In the current tax year 23/24, the income threshold for higher rate (40%) income tax is £50,270. The threshold for the HICBC is £50,000.  The HICBC was set at £50,000 when it was introduced in 2013 (10 years ago!) and has not been amended at all since then.

Therefore, it is reasonable to assume that over the years more and more families will fall foul of this restriction. Indeed, a report by the Institute for Fiscal Studies in 2019, estimated that by 2022 this tax charge would affect 1 in 5 families, up from the 1 in 8 affected when it was introduced in 2013. The current surge in inflation and likely pay increases will also accelerate more people into this situation.

All is not lost!

If you, or someone you know, finds themselves caught in this trap, all is not lost. There are planning opportunities available if you seek advice in time. 

For example, gift aid and personal pension contributions may reduce the amount of your adjusted net income. However, you should note that there exists other legislation around allowable pension contributions. Individual advice is recommended to ensure the opportunities are suitable.

Get in touch with our advisers today for support with family financial planning.

Categories: Updates