Topical tax points for law firms


1. Should I claim child benefit even if I am a higher earner?

The High-Income Child Benefit Charge (HICBC) is not new and was in fact introduced in January 2013. The HICBC is a tax charge that applies to anyone whose income exceeds £50,000 and who receives (or whose partner receives) child benefit.  The amount of the tax charge each year is dependent on the adjusted net income of the individual. Once your income exceeds £60,000, the HICBC would apply in full which essentially means all child benefit relating to that tax year is repayable.

Adjusted net income is calculated as your taxable income less certain allowable deductions.

Your taxable income is calculated as any employment income including benefits in kind and bonuses, self-employment income, rental income, investment income or taxable state benefits.  Allowable deductions include trading losses, pension contributions and gross charitable donations using the gift aid scheme.

The HICBC can be mitigated by reducing your taxable income.  One simple way to do this is to increase your allowable deductions by considering making pension contributions during the same tax year that you expect your income to exceed the £50,000 threshold.  If the pension contribution reduces your income to below £50,000 then you would no longer incur the HICBC. If the pension contribution reduces your adjusted income between £50k - £60k, the HICBC will be decreased but not fully eliminated.

An additional advantage to pension contributions for those with this level of earnings is that the contributions will attract tax relief at higher rates, which in most cases will be at 40%, and often higher.
The introduction of the HICBC in 2013 led to many families where one parent’s income exceeded £50,000 not claiming child benefit.  This negated the HICBC and the need for a tax return to be completed by the individual   (unless a return was still required due to other personal circumstances, such as self-employment or rental income. 

However, even if your income is well over £50,000, if you have a stay at home or low earning spouse/partner, it is important for them to register for child benefit for each child for a number of reasons: 

  • Firstly, if the child is registered for child benefit, then the child will automatically receive a national insurance number at age 16.
  • Secondly,  if the lower earner is registered for child benefit, they can still make an election to not actually receive the money.  However, importantly by still being registered, the lower earner will still receive their national insurance credit, at no cost to them, towards their state pension each year.  The present rules (subject to change) state that a person must have 35 qualifying years of national insurance credit to get a full state pension.  All qualifying years are important to ensure your spouse/partner receives as much state pension as possible when they come to retirement age.  A state pension forecast can be requested from the Future Pension Centre on 0800 731 0175. 

It is also important to note that while a claim is in force, child benefit can be restarted at any time if income drops below £50,000 in a year. 

Finally, if you have elected not to receive child benefit and then income is unexpectedly under £50,000 in a completed tax year, it is possible to reclaim that year’s child benefit, but a claim must be in force for this to be the case.  This can be reclaimed for up to two years as long as your income is under £50,000 and can be done by calling 0300 200 3100.

2. Partnership expenses or claims on personal tax returns?

Again not a recent change, but in 2018 HMRC updated the wording in their internal manuals relating to partnership expenses, with an emphasis on expenditure being included as an expense in the partnership accounts for items incurred or claimed by partners in relation to their business.

HMRC has since clarified its position to confirm that it is not necessary for the expense to have been included within the partnership accounts.  Providing the expense meets the wholly and exclusively test, then a deduction will be allowed through the partnership return even if it is not included within the accounts.  It is clear that it is not possible to claim any such expenses on the individual partner’s personal tax return.

Although most solicitors won’t incur many expenses relating to their practices personally, this has become more topical once again due to the pandemic, specifically with regard to the working at home allowance and also any expenses or equipment that partners may have purchased for use at home throughout the pandemic for which they would like to claim a tax deduction (subject to qualification). Any such claims must be made and agreed through the partnership tax return, which is usually prepared at an earlier stage than the individual personal tax returns.  It will not be possible to include such claims at a later date on the individual returns.  It is important that individual partners and members understand this and provide details of any such claims to their own internal accounting teams as soon as possible, and instructions can then be provided centrally and consistently from law firms to their external accountants.

For more information or advice on the topics above, please get in touch.

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