As an accountant, I often encounter clients who are uncertain about various tax implications and benefits, one of which is the High-Income Child Benefit Charge (HICBC). This policy, introduced by the UK government in January 2013, affects families where one parent earns
above a certain threshold. While its intention is to reduce the benefits for higher earners, the HICBC can be quite confusing. This blog aims to clarify what it is, who it affects, and how you can manage it effectively.
What is the High-Income Child Benefit Charge?
The High-Income Child Benefit Charge is a tax that applies to families where one parent earns over £50,000 a year. If either parent’s income exceeds this threshold, they may be required to pay back some or all of the Child Benefit received during the tax year. The charge is designed to taper off the benefit as income increases, ensuring that higher-earning families receive less support.
How Does the Charge Work?
The HICBC works on a sliding scale:
- For incomes between £50,000 and £60,000, the charge is 1% of the Child Benefit for every £100 of income over £50,000.
- Once income reaches £60,000, the charge is equal to the total amount of Child Benefit received, effectively negating the benefit.
For example, if you have two children and receive £1,828 in Child Benefit annually:
- An income of £52,000 would result in a charge of £365.60 (20% of £1,828).
- An income of £58,000 would result in a charge of £1,462.40 (80% of £1,828).
- An income of £60,000 or more would result in a charge of £1,828 (100% of £1,828).
Who Needs to Pay the Charge?
If you or your partner’s individual income exceeds £50,000, you will need to pay the HICBC. It’s important to note that it is based on individual, not combined, income. Therefore, even if the combined income of both parents is over £50,000 but neither parent earns more than £50,000 individually, the charge does not apply.
How to Pay the Charge
To pay the HICBC, you must register for Self Assessment with HM Revenue and Customs (HMRC) and file a tax return. Here’s a step-by-step guide:
1. **Register for Self Assessment:** If you aren’t already registered, you need to do so by 5 October following the tax year in which the charge applies.
2. **File Your Tax Return:** Complete the Self Assessment tax return online by 31 January following the end of the tax year. Make sure to include the Child Benefit details.
3. **Pay the Charge:** HMRC will calculate the charge based on your income and the amount of Child Benefit received, and you will need to pay this by the same 31 January deadline.
Planning and Mitigating the Charge
There are a few strategies to mitigate the impact of the HICBC:
- Salary Sacrifice: Consider sacrificing part of your salary in exchange for benefits like pension contributions, which can reduce your taxable income.
- Gift Aid Donations: Making charitable donations under Gift Aid can also reduce your taxable income.
- Transfer of Income-Producing Assets: If possible, transferring assets that generate income to your lower-earning partner can help keep your income below the threshold.
Deciding Whether to Opt Out
Families can opt out of receiving Child Benefit to avoid the HICBC, but it’s important to weigh the pros and cons. Opting out means you won’t receive the benefit payments, but it also means you won’t have to pay the charge. However, Child Benefit also provides National Insurance credits which count towards your State Pension, particularly beneficial for non-working parents or those earning less than the lower earnings limit.
Conclusion
The High-Income Child Benefit Charge can be a complex area of tax law, but understanding it is crucial for families affected by the income thresholds. By being informed and considering your financial situation carefully, you can manage your obligations effectively and avoid any unexpected charges. If you find this overwhelming, consulting with a tax professional can provide tailored advice and help you navigate the intricacies of the HICBC.
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