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29 Jan 2020

Could child benefit land you with an unexpected tax penalty from HMRC?

Parents who earn £50,000 or more and receive child benefit must submit a self-assessment tax return

Hundreds of thousands of families are being urged to check whether they need to file a self-assessment tax return in order to repay some or all of their child benefit payments.

With the 31 January self-assessment deadline just days away, many people may not realise that if they or their partner earned more than £50,000 during the 2018-19 tax year, they may have to submit a tax return - even if they don't usually have any income to declare.

Failing to submit a return when it's due could result in a penalty charge from HMRC - and it's following through on the threat. HMRC has collected £1.65bn from the high income child benefit tax charge since it was introduced in 2013, according to a Freedom of Information (FOI) request from NFU Mutual.

Here, we explain how child benefit can affect your tax bill, and why you shouldn't ever opt out of claiming it.

Who is affected by child benefit tax charges?

The people most likely to be caught out by tax charges relating to child benefit payments are parents earning more than £50,000 who don't usually have to submit self-assessment tax returns.

People who will need to submit a 2018-19 tax return for the first time to declare child benefit include:

  • new parents who are claiming child benefit for the first time
  • those who had a pay rise in 2018-19 which meant that they started earning above £50,000 for the first time
  • those claiming child benefit who have a new partner earning £50,000 or more - the partner does not have to be the parent of the child being claimed for in order to trigger a tax bill.

If any of these circumstances apply to you or your family, you'll need to submit a tax return to HMRC by midnight on 31 January.

Failing to do so could result in a fine. Around 35,000 families have been fined for failing to register for a child benefit tax charge, but a review last year saw HMRC scrap around a quarter of these.

What is the high income child benefit charge?

While child benefit isn't means-tested - anyone who's responsible for a child can claim it - there's an additional tax charge you'll need to pay if you or your partner earns more than £50,000.

This tax is called the high income child benefit charge, and it essentially means you have to pay back some of the child benefit you've received during the tax year.

The tax charge equates to 1% of child benefit paid back for every £100 of income you earn over £50,000. This means that by the time you earn £60,000, you have to repay all of your child benefit money.

How does the high income child benefit charge work?

For example, let's say you and your partner both earn £53,000 a year, and you have one child.

You'll be paid £20.70 a week, or £1,076.40 a year in child benefit.

However, as you and your partner's earnings collectively exceed £50,000 by £6,000, you will be required to pay tax of 1% for every £100 over the £50,000 threshold.

£6,000/100 is 60, so you'd need to repay 60% of your child benefit payment as a tax charge.

£1,076.40 x 60% = £645.84.

Your tax charge will therefore be £645.84; you'll keep £430.56 of the child benefit payments for the year.

To see whether the high income charge would affect the amount of child benefit you can claim, simply use our child benefit calculator below.

Should you opt out of claiming child benefit?

Regardless of how much you earn, it's always worth signing up to claim child benefit.

That's because the benefit is linked with National Insurance contributions (NICs), which go towards your state pension eligibility.

Instead, you can sign up to child benefit but just opt out of the payments; there's a box you can tick on the claim form in the section marked for 'higher income earners'.

That way, you get the benefit of NICs without having to deal with the tax charge.

If one partner is planning to take time off work in order to look after a child, the child benefit claim should be made in their name.

There have been instances of the 'wrong' parent signing up, meaning that one is left with a gap in NICs, while the other gets both child benefit and makes NICs through their employment.

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What is child benefit?

Child benefit is a monthly government payment that's paid to anyone who is responsible for a child.

While the underlying aim of child benefit is to help pay for things the child might need, from clothes to school trips, you're free to spend it on anything as it is just there to boost your general household budget.

The payment can only be paid to one person, and you don't necessarily need to be the child's parent to receive it - but you must be responsible for the child.

You'll receive £27.70 per week for your eldest or only child, and an additional £13.70 a week for any other children. There is no upper limit for the number of children you can claim for.

Child benefit can be claimed in addition to child tax credit or Universal Credit.

File your 2018-19 tax return with Which?

For an easy-to-use, jargon-free way to file your tax return, try the Which? tax calculator.

You can tot up your tax bill, get tips on how to make savings and submit your return directly to HMRC.