Are you ready for the child benefit tax charge?

Changes announced in the 2012 Budget could affect many parents who claim child benefit across the UK, but do you know what the changes mean for you?

The eight key questions you may be asking about the child benefit tax charge are detailed below:

  1. Will I be affected? If your income is £50,000 or more then your entitlement to child benefit will change.
  2. When do changes take effect? The changes take effect from 7 January 2013 and will be based on your individual 2012/13 net income.  Only the child benefit received from 7 January 2013 to 5 April 2013 will be subject to the new tax charge in 2012/13.  Annual receipt of child benefit will be captured for 2013/2014 onwards.
  3. Who will be affected? The income threshold before a tax charge will be incurred is £50,000 for either parent.
  4. What happens if my income is over £50,000? If either parent has income exceeding £50,000 the child benefit they have received in a tax year will be reclaimed through a tax charge.
  5. How much is the new tax charge? The tax charge is calculated as 1% of the child benefit received for every £100 of income over the £50,000 threshold.
  6. What if my income is over £60,000? If your income exceeds £60,000 then the tax charge will be 100% of the child benefit received.
  7. How do I pay the tax charge? If you are subject to the tax charge it will be dealt with under the Self Assessment system meaning you will need to complete a Tax Return.  The liability generated by the tax charge will be payable on or before 31 January 2014.
  8. What can I do to retain my entitlement? Increasing your pension contributions can reduce your ‘net relevant earnings’, which is  the figure that is used to calculate the tax charge.  For example, if an individual has a total income of £57,500, a net pension contribution of £6,000 (£7,500 gross) would reduce the ‘net relevant income’ to £50,000.  No tax charge would then be levied on the child benefit, and a further 20% of tax relief would be obtained, which, when combed with the child benefit retained, is a very attractive approach.

If these changes are going to affect you then there is still enough time to make changes to avoid any unexpected tax charges.  If your income exceeds £60,000 it may be worth stopping your child benefit claim with effect from 7 January 2013, however it is still advisable to complete a claim so you qualify for your National Insurance credit.  If you fall in to the £50,000 to £60,000 bracket you will still benefit from child benefit, but you should either take steps to retain your entitlement or be prepared for the tax charge you will face at the end of the tax year.

Steven Metcalf, Tax Senior, Kendal

E: steven.metcalf@armstrongwatson.co.uk

T: 01539 942030

 

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