When Child Benefit Becomes A Liability

A two parent, two child family can claim £34.40 per week in Child Benefit (CB). In a tax year this adds up to £1,789.

A picture of a child reaching for sweets

Child benefits easily get absorbed into the household budget

As is often the case in life, this becomes just part of the housekeeping and is spent.

However, let’s look at Mary, John and their two kids. The child benefit is paid directly into John’s current account and is factored into the household budget. John is a stay at home Dad, so he sorts all of the family stuff out. Mary is a solicitor and works full-time in a local practice.

Let’s say Mary receives bonuses that increase her salary to £60,000. This is £10,000 more than her salary last year, which was £50,000. It works out that after a 40% income tax deduction, Mary gets an extra £6,000. Mary and John decide to put the extra cash to good use, and part finance a holiday in Florida and also top up their ISAs.

Mary gets a shock when she discovers her self-assessment tax bill is £1,800 more than she expected. You can guess what the culprit is. Yes, it’s the High-Income Child Benefit Charge (HICBC).

The HICBC imposes an additional tax charge on families claiming the benefit where one of the parents earns more than £50,000 a year. Therefore, the child benefit must be repaid at the rate of 1% received for every £100 the highest earner’s income goes over £50,000. In Mary’s case, the excess income was £10,000. Therefore 100% of any CB received will have to be repaid. Accordingly, Mary’s self-assessment included a £1,789 HICBC.

Reluctantly, Mary and John had to withdraw the £1,789 from their ISAs and give it back.

A picture of kids eating

Make sure you’re not caught unawares

Mary thought receiving only £6,000 of her £10,000 bonus was bad enough, but she now realises that the true “tax” cost was £5,789 (£4,000 income tax and £1,789 HICBC). The combined tax hit wasn’t 40% of her income but added up to 58%.

Any parents exceeding the £50,000 income limit for the first time and claim child benefit will find themselves in a similar position to Mary and John and will need to plan accordingly.

Bracey’s are always ahead of the curve when it comes to legislation and advice. Get in touch now to discuss any aspects of your business or accounting needs.