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A million families hit by High Income Child Benefit Charge

Paloma Kubiak
Written By:
Paloma Kubiak

More than a million families are affected by the controversial benefit tax, with HMRC saving around £10bn in the past decade, estimates suggest.

Around 355,000 families were hit with the High Income Child Benefit Charge (HICBC) in 2020/21, according to the latest figures, returning £405m to HMRC.

In total, since the introduction of the HICBC, receipts for this tax – applied when a parent claiming child benefit earns more than £50,000 a year – stand at £3.37bn.

Due to this tax charge, many families opt out of receiving child benefit, with insurer NFU Mutual estimating that this move by parents has saved HMRC “at least a further £6.8bn”.

It explained that this figure is based on the reduced cost of child benefit to the Government since the tax was introduced, adding that 683,000 families have opted out of receiving the benefit altogether.

High Income Child Benefit Charge explained

Child benefit is paid to the parents and guardians of children under the age of 16, or under 20 if they stay in approved full-time education or training. It is currently set at £24 a week for the eldest child and £15.90 a week for each younger child.

The HICBC was introduced in 2013 and affects families where one parent earns more than £50,000 (net) a year.

Those with income above this figure are required to pay 1% income tax on the child benefit for each £100 of income above this. This means the value of child benefit is eroded to nil once the taxable income of one of the adults exceeds £60,000.

Even if you normally pay tax through the PAYE system, you must submit a tax return to pay the tax.

NFU Mutual said that as wages increase, a growing number of families are opting out of receiving child benefit.

Further, had the £50,000 threshold kept up with inflation, it would be nearer to £65,000 now.

‘In desperate need of reform’

Sean McCann, chartered financial planner at NFU Mutual, said: “HMRC has recovered billions of pounds in child benefit since introducing this tax a decade ago, but has saved even more from those families who have opted out of receiving it altogether.

“Many families take the view that it is far simpler to opt out of receiving the benefit rather than repay it through an increased tax charge.

“The child benefit tax charge is in desperate need of reform. When it was introduced ten years ago it was supposed to catch high earners, but the £50,000 threshold hasn’t changed in over a decade.

“Now, more and more middle-income families are getting caught in the net as wages rise to keep pace with inflation.”

McCann added that many parents crossing the £50,000 income threshold for the first time and becoming liable for the tax won’t realise they need to complete a self-assessment return and repay some or all of their child benefit.

“Those who wait to be contacted by HMRC could find themselves facing tax from previous years, interest payments and in some cases, penalty charges.

“The onus is on the individual with the highest income in the household to pay any child benefit tax due, this can cause issues with couples who don’t normally share details of their earnings with each other.

“We have seen situations of individuals with income of more than £50,000 moving in with a new partner who claims child benefit, and finding themselves liable to pay the tax, even though they themselves are not entitled to claim child benefit.”

Pension boost trick to reduce the tax

One workaround to avoid the tax charge is to pay more money into your pension pot. This is because the tax is based on the income of the highest earner in the household – and this is the adjusted net income – after pension contributions.

By reducing your income to £50,000 or below through pension contributions, McCann said “this can be a very effective way of dealing with this tax”.

He gave the following example:

If the top earner in a family with three children earned £60,000, they could save £4,847 a year in tax by paying £8,000 into their pension.

The £2,000 tax relief that their pension provider claims from HMRC on top of the £8,000 would take their taxable earnings down to £50,000. Not only would they save £2,901 from the child benefit charge, but they would also take their income below the 40% tax charge.

For a family with three children, this would result in an extra £10,000 in their pension pot at a cost of just £3,153, with a total of £6,847 saved in tax.