How will the changes in child benefit affect you?

From 7th January 2013 your claim for child benefit may change

The finance bill 2012 introduced a new charge on taxpayers who have ‘adjusted net income’ of over £50,000 in a tax year, where either they or their partner are in receipt of Child Benefit in the year.

The charge will affect Child Benefit received from 7th January 2013 for those with income received in excess of £50,000 in the tax year ending 5th April 2013. This will be chargable on the partner with the higher income.

‘Adjusted net income’ is the total of your income which is subject to income tax, less specific deductions, such as ‘grossed up’ pension contributions, Gift Aid donations or trading losses.

The tax charge is applied at a rate of 1% of the Child Benefit received, for every £100 of income above the £50,000 limit. Once your annual income reaches £60,000, the charge will be equal to the whole amount of the Child Benefit received. If you know your income will exceed this amount, you have the option of stopping your Child Benefit to prevent the tax charge.

For example, if you have income of £54,000 and your partner receives Child Benefit for 2 children of £1,752 for a whole year, the charge will be 40% of the £1,752 Child Benefit = £700. The percentage is determined as follows £54,000 – £50,000 = 4000 /100 = 40%.

If you have income of £70,000 and your partner receives Child Benefit for 2 children of £1,752 for a whole year, the charge will be on £1,752 which is the full amount of the child benefit received.

The tax underpaid will be collected through self-assessment or via a restriction in the tax code.

What do you need to do next?

Contact our tax department to discuss your case on 0161 249 5040 or email partners@leonherman.co.uk

This will affect partners, sole traders and directors taking low salaries with higher dividends and the high earners.