The latest changes to Child Benefit came into effect on January 7th 2013. How are you impacted?
Introduction
Instead of withdrawing the benefit from all higher rate tax payers, as had been previously planned, Child Benefit will now be withdrawn steadily from families where one parent earns over £50,000. This removes a “benefit cliff” for those earning just over the higher rate tax band.
New Rules
The new rules are like this:
•If both parents earn under £50,000 they will keep all of their Child Benefit payments.
•If either parent earns over £60,000 then all Child Benefit will be lost.
•If either parent earns between £50,000 and £60,000 then 1% of Child Benefit payments will be deducted for every £100 earned above the £50,000 limit
Child Benefit will continue to be paid as normal whether or not individual parent’s earnings are over the £50,000 threshold. A “High Income Child Benefit” tax charge will be levied by HMRC on “adjusted net income” to recoup the benefit.
Adjusted net income is defined by HMRC as total taxable income (including income from employment (including any company benefits), pensions, savings and dividend income) less tax relief on Gift Aid, gross payments made to pension schemes without tax relief or trading losses.
If both parents earn over £50,000, the Higher Income Tax charge will be applied to whoever earns the most, regardless of who the Child Benefit is paid to.
In the case of separation the person receiving child benefit will keep the payments in full provided they don’t earn over £50,000 even if the other parent does earn over £50,000. The other parent will not have to pay the Higher Income Tax Charge.
Taxation
From a taxation perspective it is possible to reduce the impact of the Higher Income Tax Charge or avoid it all together by reducing adjusted net income.
This can be achieved by making additional pension payments (or opening a pension scheme) or taking up “salary sacrifice” options such as childcare vouchers.
If either party is self-employed or working on a freelance basis for a number of employers then setting up a limited company could also be an option, although this is highly dependent on individual circumstances.
If you need help in dealing with the impact of High Income Child Benefit on your tax affairs then call Lewis Smith & Co. to arrange an appointment by on 01384 235549 or email us at info@lewissmith.com.
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