HMRC is being given the power to investigate thousands of individuals who didn’t declare the high income child benefit charge because they weren’t aware they had to pay it. It could land them with more tax to pay and hefty penalties. Does HMRC have you in its sights?
Who pays the HICBC?
If you or your partner receive child benefit and one or both of you has adjusted net income (ANI) of more than £50,000, the one with the highest income must pay the high income child benefit charge (HICBC). This can apply even if you aren’t married or in a civil partnership. The HICBC is equal to 1% of the amount of the child benefit for every £100 of income over £50,000. So when your or your partner’s income reaches £60,000, the charge will claw back all the child benefit.
You’re responsible
It’s up to the person liable to the HICBC to tell HMRC. Failure to do so can result in a penalty. It’s not necessarily the person receiving child benefit who’s landed with the charge, so if you run your finances separately you won’t know if it’s you or they who should be paying.
Tip. It’s important you share sufficient financial information so that neither you nor the other person affected fall foul of the requirement to declare your HICBC. If exchanging income details is awkward HMRC can give you limited information to help you decide if you need to pay the HICBC.
Avoid the charge by opting out
If you know all the child benefit will be clawed back by the HICBC you can choose not to receive it. This avoids the rigmarole of notifying HMRC and paying the charge.
Tip. If you elect not to receive child benefit because the HICBC will claw it all back but your circumstances change meaning the full charge won’t apply, you can cancel the election and retrospectively claim the child benefit. You must do this within two years.
How you pay
If you’re liable to the HICBC you have to complete a tax return to declare it, even if you pay all your tax through PAYE. This means if you don’t usually complete tax returns and become liable to pay the HICBC for the first time you’ll need to register for self-assessment by 5 October following the end of the tax year in which you’re first liable.
Tip. If you’re liable to the HICBC you can reduce or eliminate it by reducing your ANI to below £60,000. A way to do this is by making extra pension or gift aid payments.
Example. Fred and Wilma have two children for whom Wilma is paid child benefit. For 2021/22 Fred predicted his ANI would be £67,000 and Wilma’s, £35,000. They each pay into a private pension – Fred £6,000 and Wilma £5,000 – and make gift aid payments of £400 per year. Fred’s ANI is £60,600 so the HICBC claws back the child benefit in full. Fred can reduce the charge by paying extra pension contributions to reduce his ANI below £60,000. A further reduction could be achieved if Fred takes on Wilma’s gift aid payment. For every £1,000 Fred reduces his ANI below £60,000, the HICBC payable is reduced by 10%.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.