Understanding high income child benefit charge

The Managing Director of Plus Accounting, Paul Feist, explains the High Income Child Benefit Charge. 

As many of us know to our cost, the application of the High Income Child Benefit Charge for those earning over £50,000 per year has been in place since 7 January 2013.  In essence, we are talking about the partial or complete loss of child benefit for some tax payers.

The rules apply to the highest earning taxpayer in the household and the effect of the charge is to claw back the child benefit progressively on incomes from £50,000 so that the benefit completely disappears for taxpayers who earn £60,000. For a family with three children, this is a loss of tax free income of almost £2,500 and in order for a 40% tax payer to make up that he or she would have to earn a gross amount of £4,167.

As I pointed out above, the charge is applied to the highest earner so we have a situation where a couple can earn £50,000 each with no loss of benefit compared to a household with a non-earning partner and a working partner on £60,000 where the full charge applies.    

The question is, can the taxpayer earning £60,000 take steps to prevent this loss of benefit?  It may seem obvious, but perhaps a £60,000 earner might consider working less and accept a reduced income of £50,000.  At first sight, a reduction of £10,000 of income might seem rather drastic but then there are considerable savings to be made. Firstly, the child benefit would be retained which for three children is worth £2,475 in 2014/15.  Then there is the saving in tax at 40% and national insurance of 2% which total £4,200 on a £10,000 slice of income.  Overall, the savings amount to £6,675 which means the taxpayer is left to cover only £3,325 of the reduced income and has more spare time!

For those couples who have their own business, a greater degree of flexibility might be available.  For example, in a family owned company where the shares are not owned equally, a couple might decide to alter those proportions so when any dividends are voted, the incomes are closer together or equal.  By careful planning, the family may be able to prevent the loss of the child benefit and save income tax at the same time.

Paul can be contacted at paulf@plusaccounting.co.uk.

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