Child benefit changes closing in, York expert warns

16 Oct 2012 @ 10.19 pm
| Business

Chancellor George Osborne talks about the child benefit changes earlier this year

Richard Whitelock, of leading York accountants Garbutt & Elliott (pictured below right), says it’s time for families to prepare for what could be a major change to their household budgets

Radical changes in the provision of child benefit are only weeks away from being implemented. The new child benefit rules, designed to save the Government £700 million a year, are expected to affect 1.2 million families when they come into effect on January 7, 2013.

The rules progressively claw back child benefit from households where someone earns more than £50,000; and anyone earning £60,000 or more will get no benefit.

The withdrawal of the child benefit is to be done by way of a new income tax charge, to be levied on the higher earner. So the mother may still receive the benefit while either she or her partner has to pay it back through additional income tax. This is not limited to married couples and civil partners, but also covers couples living together as partners.

It is possible to elect not to continue to receive the benefit in the first place, and so avoid the tax charge, but this right rests solely with the person receiving the benefit, so in some cases this will mean that they can decide whether or not their partner is hit with the new tax charge.

Many of the anomalies thrown up by the £50,000 limit have already been highlighted in the media, such as the fact that two individuals each earning £49,000 (total household income of £98,000) continue to receive the full child benefit, whereas one partner earning £60,000 with the other not working will receive no benefit.

There are other ramifications that should not be overlooked, including:

  • From this current tax year, all employees earning more than £50,000 and also receiving child benefit must notify HMRC – penalties will imposed if they do not
  • The income limits are annual limits, but the partnership test is a weekly test – the new rules can become quite complex if there is a change in a relationship midway through a tax year

The mechanics of the withdrawal calculation means that those in receipt of child benefit must now know their partner’s income in order to manage their own tax affairs correctly. They will also have to pass this information on to their advisers, as well as more personal details, including confirmation of when they and their partner began or ceased living together during a tax year.

The changes are now just weeks away, but there is there time to plan for them if circumstances permit. Some people may be able to tailor their income levels in order to maintain their benefits entitlement, such as business owners who are in control of when they extract profits.

Employers may wish to consider helping their employees who are at or over the £50,000 level by offering salary sacrifice schemes for pension contributions, for example. If that is impossible, then notifying the Revenue HMRC, or formally electing to stop receiving the benefit completely, must also be dealt with sooner rather than later.

  • Leading accountants Garbutt & Elliott have their York HQ at Arabesque House, Monks Cross
  • Visit their website here