Families with one partner earning over £50,000 a year will begin to receive reduced child benefit payments from today, with households earning more than £60,000 seeing the payments disappear altogether.
Child benefit used to be a universal benefit for anyone with children. However, the Chancellor George Osborne announced in the 2012 Budget that higher earners would be means tested for child benefit, which is thought to save the Treasury £2bn a year.
This means that 1.1 million recipients will lose some or all of their child benefit payments, with the average loss around £1,300. Some 70% of those affected by the new rules will no longer receive child benefit payments at all.
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How the new child benefit rules work
Child benefit payments are being reduced for any family where one parent earns £50,000 or more. The benefit will be reduced on a sliding scale the more a parent earns over £50,000. This is 1% for every £100 earned over £50,000.
Families with one parent earning over £60,000 will see child benefit payments reduced completely.
However, families that simply have a combined income over £50,000 – say one parent earns £30,000 and the other earns £25,000 – won’t be affected by the changes. In theory, this means that both partners can earn up to £49,000 and still receive full child benefit, even though their combined household income is £98,000.
Self-assessment tax returns
In the build up to the introduction of the new child benefit rules, families affected were given the option of stopping child benefit payments. HMRC has stated that 200,000 people have done this. However, those that have not opted-out will continue to receive the payments, but must repay them through higher tax.
The new High Income Child Benefit Charge must be declared by the highest earning partner on an annual self-assessment tax return. This will first need to be completed by January 2014 (online), for any child benefit payments received between today and 5 April 2013 – the current tax year.
Families with one parent earning over £60,000 who cancel child benefit payments now will only have a small amount to repay in their 2014 tax assessment and then will not have to fill out a self-assessment tax return in 2015.
You can choose to pay the Charge as either a lump sum, or have it clawed back through an adjustment to your tax code.
Net-adjusted income – why this is so important
Crucially, the reduction in child benefit payments will only tax place if your ‘net-adjusted’ or taxable income is over the £50,000 threshold. This is your income after things like pension contributions, benefits-in-kind and salary sacrifice.
Therefore, even if your gross salary is £60,000, you may not be affected by the changes, or may see a smaller reduction in child benefit payments. There are other ways to keep hold of your child benefit payments, which include:
- Buying childcare vouchers or extra holiday
- Paying more into your pension through additional voluntary contributions
- Giving money to charity through your salary
This acts as a way of reducing your taxable income. Find out more in our guide to salary sacrifice.