When child benefit becomes a liability
A typical two parent, two child family can claim £34.40 per week in Child Benefit (CB). In a tax year this would amount to £1,789.
Often, this becomes part of the family housekeeping and is spent.
Consider Mary and John and their two children. John collects the CB, it is paid into his current account and used to fund the household budget. John elected to stay at home and look after the management of the family. Mary is a solicitor and has a full-time job in a local practice.
In the current tax year, Mary will receive bonuses that increase her salary to £60,000. This is £10,000 more than her previous year’s salary which amounted to £50,000. After a 40% income tax deduction, Mary will receive an additional £6,000. Mary and John decide to use the extra cash to part finance a holiday in Florida and top up their ISAs.
Imagine their surprise when Mary discovers her self-assessment tax bill is £1,800 more than she expected. The culprit, the High Income Child Benefit Charge (HICBC).
The HICBC levies an additional tax charge on families that claim CB and where one of the parents earns more than £50,000 in a tax year. Effectively, CB must be repaid at the rate of 1% of CB received for every £100 the highest earner’s income exceeds £50,000. In Mary’s case, this excess income was £10,000 and 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.
Mary thought that receiving just £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 was not 40% of her income but 58%.
Parents who exceed the £50,000 income limit for the first time and draw CB will find themselves in a similar position to Mary and John and will need to plan accordingly.
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