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Warning as basic rate taxpayers face ‘high income’ child benefit charge

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Basic rate taxpayers may unexpectedly come under the scope of the High Income Child Benefit Charge in April for the first time due to an earnings threshold mismatch for the scheme.

Parents who may not consider themselves ‘high earners’ may be subject to a tax charge when claiming Child Benefit due to a discrepancy in two earnings thresholds used by the government.

Currently, Child Benefit stands at £21.05 a week for the eldest or only child, and £13.95 for additional children.

Where either parent earns £50,000 or more, the High Income Child Benefit Charge (HICBC) kicks in with the sum subject to tax.

For every £100 earned above £50,000, 1% of the child benefit received is effectively withdrawn through the charge. Anyone earning £60,000 or more loses all the benefit through tax.

The HICBC was introduced in 2013 and the £50,000 limit has remained unchanged.

However, the higher rate tax threshold has changed over the years. While it currently stands at £50,000, this figure will rise to £50,270 in the new tax year in April as announced in the November Spending Review.

This means for the first time, the higher rate tax threshold will exceed the £50,000 HICBC.

The Low Incomes Tax Reform Group (LITRG), part of the Chartered Institute of Taxation (CIOT), said this means the policy “will no longer meet its original intent to only target higher rate taxpayers”.

As such, it suggests the government compensate for eight years of inflation and rising wages by raising the £50,000 income threshold to at least £60,000.

Further, it is also calling for the point at which Child Benefit is fully clawed back to increase from £60,000 to £75,000.

‘The £50,000 threshold is no longer tenable’

Tom Henderson, technical officer for LITRG, said: “When the HICBC was announced in 2010, the government’s policy intent was that it would only affect higher-rate taxpayers from January 2013.

“For the 2012/13 tax year, the higher rate threshold – the point at which an individual is liable to the higher rate of tax – was £42,475. Since then, the higher rate threshold has risen broadly in line with inflation but the £50,000 threshold for the HICBC has remained static. The government has so far resisted calls to up-rate the £50,000 threshold, but this is no longer tenable now the higher-rate threshold will overtake it from 6 April 2021.”

LITRG argues that the structure of the charge encourages those otherwise liable not to claim Child Benefit. This impacts the claimant’s state pension record, as they potentially miss out on National Insurance credits. For those not claiming, it also means children will not automatically get a National Insurance number when they turn 16.

Henderson added: “The HICBC has been a controversial policy since its introduction. Despite its name, the way the charge operates has consequences for the whole household, including the partner with the lower adjusted net income, and the child. We would like the government to carry out a review of the policy and address those areas where it appears the charge is not meeting its original objectives.”

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