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HMRC £2.5bn high income child benefit tax charge clawback

Emma Lunn
Written By:
Emma Lunn

The tax man has clawed back more than £2.51bn in high income child benefit tax, according to figures revealed in a freedom of information request by NFU Mutual.

The complex tax charge has also saved the government an estimated £4.3bn as more than half a million families have opted out of receiving child benefit.

Financial advisers at NFU Mutual are now warning that unless the £50,000 threshold – which hasn’t changed since 2013 – is reviewed in the chancellor’s budget on 3 March, the tax could start affecting some basic rate taxpayers.

Sean McCann, chartered financial planner at NFU Mutual, said: “These figures show the government has clawed back billions through the child benefit tax charge. The £50,000 threshold hasn’t changed since it was introduced in 2013, meaning that more and more families have been caught as incomes have increased.

“In 2013, 40% income tax was payable on income over £42,475. The £50,000 child benefit threshold was set at a level perceived to be a ‘high income’. Since then, the point at which 40% income tax becomes payable has risen to £50,000, while the threshold for the ‘high income’ child benefit tax charge has remained the same.

“If, as expected the threshold for paying 40% income tax increases above £50,000 in the budget, we could see some basic rate taxpayers impacted by the charge for the first time.”

These figures come after an HMRC clampdown on those who fail to declare and pay the tax. Compliance checks made by HMRC nearly doubled from 63,591 in 2018/19 to 125,594 in 2019/20 and 96% of those checks resulted in a tax bill.

McCann said: “Many are unaware of this complex tax and the fines for failing to pay it. Even if you’re paid through PAYE and don’t normally complete a tax return, if you’re the highest earner in your household, with income over £50,000, the onus is on you to tell HMRC and pay the tax.

“If you have a pay rise or move in with a new partner who claims child benefit, you could be caught, even if they’re not your children. The good news is that anything you pay into your pension is knocked off your income before the charge is assessed. If it reduces your income below £50,000 you won’t need to pay the charge.”

As well as clawing back more than £2.5bn in repaid child benefit, the high income child benefit tax charge has also saved the government billions, as more than 500,000 families have opted out of receiving the benefit altogether.

How to keep receiving child benefit while boosting your pension

One way to save your family money and reduce the risk of this charge is to pay more into your pension pot.

For example, if the top earner in a family with three children earned £60,000, they could save £4,500 a year in tax by paying £8,000 into their pension.

The £2,000 tax relief on top of the £8,000 would take their taxable earnings down to £50,000. Not only would they save £2,500 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 £3,500, with a total of £4,500 saved in tax.