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Families to earn £120k before Child Benefit charge kicks in

Families to earn £120k before Child Benefit charge kicks in
Paloma Kubiak
Written By:
Paloma Kubiak
Posted:
07/06/2024
Updated:
07/06/2024

The Conservatives are finally addressing the unfair Child Benefit system, as they’ve pledged to double the income threshold to £120,000, pegged to households, rather than an individual’s earnings.

In two major – and long-overdue – pledges to reform Child Benefit, the Conservatives announced they would double the threshold at which families pay the High Income Child Benefit Charge (HICBC) from the current £60,000 to £120,000.

The top taper – at which point the benefit is completely withdrawn – is also set to be doubled from the current £80,000 to £160,000.

Further, to address one of the main criticisms of the Child Benefit tax charge, it will consider overall household earnings, rather than individual income from the highest earner.

As it stands, a household with two parents each earning £59,000, so a total of £118,000, get to keep the full Child Benefit.

However, a household earning less overall but with a single parent earning above £60,000 is drawn into paying the Child Benefit tax charge.

For years, campaigners criticised the system for essentially penalising single parents brought into paying the charge, while earning less than working parents who could bring in a higher combined income of six figures.

In the Budget 2024, Chancellor Jeremy Hunt announced an increase in the threshold from £50,000 to £60,000, which took effect just this April, while the upper limit was increased to £80,000.

At the same time, he also confirmed it will be based on household rather than individual incomes by April 2026. Now the Tories have gone one step further by bringing forward this pledge.

Child Benefit and the High Income Child Benefit Charge

Currently, 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 £25.60 per week for the eldest child and £16.95 per week for each younger child.

But Child Benefit is withdrawn when one parent in a household earns over £60,000 per year, though two parents each earning £59,000 per year receive it in full.

This figure is your adjusted net income, which is your total taxable income before any personal allowances and after certain deductions such as pension contributions, donations to charity or trading losses.

Those with income above £60,000 are required to pay 1% of the Child Benefit for each £200 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 £80,000.

As it’s tapered on earnings between £60,000 and £80,000, if you earn £70,000, you lose 50% of your Child Benefit. It also means submitting a tax return, even if you’re usually PAYE.

Doubling this top taper to £160,000 would “deliver a financial boost to parents currently missing out on this valuable benefit”, according to Alice Haine, personal finance analyst at Bestinvest.

Meanwhile, Shaun Moore, tax and financial planning expert at Quilter, said that the announcement to peg the HICBC to household income “will be music to many parents’ ears”.

However, he said it has “taken years for the penny to drop”, adding that whether this “long-awaited but sensible policy” will see the light of day is yet to be seen.

“Although this will certainly add more complexity for HMRC into the Child Benefit system, the benefits of rectifying the current system’s unfairness far outweigh these challenges,” he said.

The policy is set to cost £1.3bn, with help from a crackdown on tax avoidance and evasion.

In calculations by Quilter, it suggests a couple with two children where one person earns £80,000 and another earns £20,000 will now be able to keep all £2,212.60 of their Child Benefit, when they previously would have kept none.

Similarly, one parent earning £70,000 while the other earns roughly the average salary in the UK of £35,000 will be over £1,106.30 better off and receive the full Child Benefit under these proposals.