Beware Child Benefit and tax if you have a high income
QUESTION: I'm married with two kids and have recently earned a promotion at work and my annual pay has increased from £48,000 to £52,000. I still receive child benefit and have read that I may have to pay more tax due to my increase in salary. Is this correct?
ANSWER: Child benefit has always been paid to families with children, regardless of household income. But there was a big change in January 2013. Child benefit still continues to be paid to everyone, but if you're a higher-income family, you'll have to pay extra tax if you choose to keep getting it. The extra tax you pay will effectively cancel out some or all of your child benefit.
You'll have to pay more tax if either you or your partner have an income over £50,000 a year but you'll still continue to receive the same amount of benefit. If your income is over £60,000 a year, you'll pay so much more in tax that it will cancel out all of the child benefit you get.
It's the income of each partner in the household that counts. Your combined income won't be taken into account. This means that if one of you has an income of over £50,000, you'll be affected by the changes, even if the other partner doesn't have any income at all.
But if both you and your partner have an income just below the £50,000 limit, you'll still continue to receive the full amount of child benefit and won't have to pay any extra tax. If both and your partner have an income over £50,000, whoever has the higher income will have to pay the extra tax.
Your income will generally be your income before tax and deduction of 'personal allowance'. It includes everything you pay tax on, such as your wages or profits from self-employment, savings interest or rental income. Your income is reduced by some deductions, such as certain pension contributions or Gift Aid donations to charities. This is called 'adjusted net income'.
As you have an income between £50,000 and £60,000 a year, the amount of extra tax you'll have to pay will be one per cent of the amount of child benefit you get for every £100 of your income above £50,000. If your income gets more than £60,000, the amount of extra tax you'll have to pay will be the same as the amount of child benefit your household gets.
You can choose not to receive any child benefit, if you don't want to pay the extra tax. However, HMRC is encouraging you to still fill out a child benefit claim form even if you choose not to actually receive any child benefit payments from them. This is because filing your claim form for child benefit can help you build up national insurance credits which can help protect your future state pension. This is particularly important if you've stopped work to look after children full time. Completing a child benefit claim form will make it easier for payments to start again if your circumstances change and your income falls below the £50,000 limit.
If you decide to continue getting child benefit, you'll have to fill in a self-assessment tax return. This is when you'll have to declare you were getting Child Benefit and pay the extra tax. You'll have to register for self-assessment if you are not already registered. You can choose to pay the tax charge either as a lump sum through self-assessment or through your tax code under pay as you earn (PAYE).
However, even if you choose to pay the tax charge in instalments through PAYE, you'll still have to complete a self-assessment tax return. It is your responsibility to pay the extra tax, even if you don't hear from HMRC.
You may be able to avoid having to pay the extra tax and still receive child benefit, by reducing your taxable income. For example, you could do this by paying more into your pension. Pension contributions are taken out of your income before you pay tax. This could therefore reduce the amount of income on which you have to pay tax to below the £50,000 limit. You could also consider using salary sacrifice and opt to have some of your pay paid in the form of childcare vouchers. Childcare vouchers are also taken out of your income before you pay tax, so your taxable income will also reduce.
:: Paddy Harty (email@example.com) is director at PKF-FPM Accountants (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.