Earlier this year George Osborne announced plans to withdraw child benefit in full from all higher rate tax payers. However, these changes were widely criticised as being unfair and he has now revised his original plan. From 7th January 2012 those who earn over £60,000 a year will lose their child benefit entirely, while people who earn over £50,000 a year will see it gradually withdrawn depending on how much they earn.
If both you and your partner earn under £50,000 a year you will keep all of your child benefit payments. If either you or your partner earn over £60,000 you will lose your child benefit in full. However, if you or your partner earn between £50,000 and £60,000 you will lose 1% of your child benefit payments for every £100 you earn above the £50,000 threshold – so for example if you earn £55,000 you will lose 50% of your child benefit.
The taxman will take earnings from your main job, any other jobs you have, rental income and anything you earn from savings and investments into account when they’re calculating how much you should lose.
However, what makes this new system even more confusing is if you earn over the £60,000 payment threshold your child benefit will continue to be paid as normal after January 2013.
Instead, if you’re a higher earner the government will take the equivalent value back through an additional Income Tax charge and if you earn over £60,000 this additional Income Tax charge will be equal to your entire child benefit entitlement. If both you and your partner earn over £50,000, the additional Income Tax charge will be applied to whoever earns the most, regardless of who the child benefit is paid to.
If you are separated from your partner and your ex-partner earns over £50,000 but you receive child benefit for your children you will be permitted to keep the payments in full (providing you earn under the £50,000 threshold).
If you and your partner separate after the change takes effect you will no longer be liable to pay the additional Income Tax charge. This will take effect from your date of separation, rather than the end of the tax year – so you will need to inform HMRC accordingly.
If you want to avoid the additional Income Tax charge, or don’t want your partner to have to pay the tax because you receive child benefit, you can opt to stop your child benefit payments by notifying HMRC. If you do this you should still complete a child benefit application if you have any more children, even if you don’t want to claim child benefit for them. This is because your child benefit entitlement affects whether you qualify for National Insurance credits and could affect whether you will be able to claim a full state pension.
The only way to reduce the amount of the additional Income Tax charge you need to pay while keeping your child benefit is to reduce your taxable income. This can be done by making additional payments into any personal pension, or by purchasing childcare vouchers; both of which qualify for tax relief.