Rachel Finch of leading accountancy firm Burton Sweet discusses Child Benefit Withdrawal and what it means to businesses and families.
From January 7 2013 major changes are happening to the child benefit system which could affect your family.
From this date taxpayers who receive Child Benefit and whose total prorated income (or whose partner’s income) exceeds £50,000 will have a tax charge applied to their income via their Self-Assessment Tax Return – which will effectively reduce the financial benefit of receiving child benefit; unless they opt out of receiving Child Benefits altogether.
For individuals with annual income over the £50,000 threshold (after gross pension contributions and gross charitable donations) who chose to continue to receive the benefit, the benefit will be reduced by £1 for every £100 that their income exceeds the threshold by paying a ‘charge’.
Penalising earning households
The reason this charge has been the subject of much discussion and protest is the fact it penalises single earning households.
For example, Mr and Mrs Smith each earn £49,999 per annum and so they have total income of £99,998. They are entitled to continue to receive full Child Benefit as neither of their individual incomes exceed £50,000.
Mr and Mrs Blogs on the other hand who have a combined income of £60,000 earned solely by Mr Blogs (whilst Mrs Blogs stays at home and cares for the children) will no longer receive any child benefit.
It is speculated that many individuals will be brought into the Self Assessment Tax Return regime for no other reason but for the logistical implementation of Child Benefits and HMRC will soon be writing to individuals they think may be affected.
However, should you wish to opt out of receiving Child Benefits you will also no longer be required to file Tax Returns.
This gives individuals the option to weigh up the advantages or disadvantages of making a claim as it is also important to bear in mind the increased burden of having to complete Self Assessment Tax Returns and the associated costs should you outsource this to a third party accountant or tax adviser.
If you’re affected
If you think you may be affected by the upcoming changes, do not wait until it is too late to do anything about it, you should act now by considering the following options:
• If you are in a position to do so, it may be worth considering ways to equalise income between you and your partner to keep you both below the £50,000 threshold.
• If your income breaches the threshold by a relatively small amount it may be worth sacrificing some salary in order to continue to receive the tax free benefit.
For example, an individual who has total gross income of £51,000 with one child will receive child benefit of £1,055. This is equivalent to £1,819 of gross taxable and NIC’able income so, this individual would be better off by £818 if they were to receive the benefit and sacrifice £1,001 of their income so that it did not breach the £50,000 threshold.
• An alternative to sacrificing salary is to make pension contributions or charitable donations as these will have a compounded effect. Not only do they increase the threshold at which you pay basic rate tax but they also serve as an income deduction for the purposes of calculating your entitlement to Child Benefits.
• For the current tax year, income received prior to 7th January will be ignored. Therefore you may want to look at taking dividends or bonuses prior to 7th January so that they do not affect your Child Benefit claim for the current tax year.
For further information and advice about how these changes affect you please do not hesitate to contact a member of Burton Sweet’s tax department.
To find out more about Burton Sweet please visit: http://www.burton-sweet.co.uk/