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It has long been considered that the current child benefit system is unfair with many families having to repay part, or all, of the child benefit received even though, as a household, their total income could be lower than a family entitled to keep all of their child benefit.
The rules have historically only considered the highest earner’s income from a household rather than the total household income. This creates the unfair situation where a family with a total income of £100,000 of which £60,000 is from the higher earner has to be repaid in full, compared a family where the income is earned equally with the partners each earning £50,000.
Likewise, the £50,000 threshold at which child benefit starts to be repaid has remained the same since the rules were introduced in January 2013. With recent wage inflation, more and more households have found themselves subject to the Child Benefit High Income tax charge, which gives an effective tax rate of 60.75% for a family with two children. Chris Hall, Associate Tax Adviser, explores the changes and what it means for you.
To help reduce the number of people caught by high income child benefit tax charge, Jeremy Hunt announced in the Spring Budget that from 6th April 2024 the threshold will be increased to £60,000. This will be a welcome change for many with the Government estimating 485,000 families will benefit as a result.
In addition to this, the point at which the child benefit will be repaid in full will be increased to £80,000. This spreads the rate at which the child benefit is repaid and helps to reduce the effective tax rate for those who do face the child benefit tax charge.
These changes are interim measures. From April 2026 HMRC would look to consider total household income. Whilst it was not announced what the threshold of household income will be, this is welcome news to many creating fairer tax legislation, which removes the anomaly highlighted at the start of this article.
With these changes now in place, anyone who has previously opted out of claiming child benefit should review their position to ensure they elect to claim it going forward if they are now entitled to claim. If you do however, you will need to remember that any claims will be backdated three months and if you do this before 8 July 2024, you may inadvertently incur a Tax charge for 2023/24. It is important in this case, that any new cases are delayed until after this date, whilst if you are reinstating the Child Benefit, you can request that HMRC restart the payments from 6 April 2024.
For many people the changes will result in them being able to keep part of all of the child benefit but there will still be those who will need to repay part, or all, of the child benefit received. It is therefore worth exploring the potential planning options available.
Pension contributions
Any pension contributions made will reduce your adjusted income in calculating whether you have a child benefit tax charge. Therefore, further pension contributions could be considered to reduce the child benefit tax charge.
Gift aid donations
Similarly, to pension contributions, gift aid donations also reduce your adjusted income and could therefore be considered to reduce the amount of child benefit that would be repayable. Whilst this has a tax benefit, it might only be considered where gifts were already being made.
Investment
If you have significant investment income, either from bank interest or stocks and shares, which is resulting in the child benefit being repaid, it could be beneficial to transfer the accounts in the lower earner’s name to reduce the taxable income and entitle you to retain more of the child benefit.
In addition to the potential saving of child benefit, this could also give a tax saving if the lower earner is a basic rate taxpayer or has unused allowances.
Inevitably, every individual’s circumstances are different and if you would like advice on options available to you, please get in touch by calling 0330 058 6559 or emailing hello@scruttonbland.co.uk
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