Q&A Everything you need to know about child benefit changesChanges to the child benefit rules will come into effect from Monday 7th January, but just what is changing? How will the changes affect you? What action do you need to take?

Our latest Q & A answers all these questions and more.

What is changing?

Child benefit was previously a universal benefit, paid to all parents, irrespective of their income. Currently paid in respect of around 14 million children, child benefit is set at £20.30 per week for the first child and £13.40 per week for each additional child. The benefit is routinely paid until the child is 16 and in some circumstances, can continue until the age of 20.

However, the government has announced that from 7th January 2013 child benefit will be means tested and withdrawn from some households.

Need help or advice? Our advisers can help you make the right decisions

Bev Stoves & Sarah McCarthy, Independent Financial Advisers, Investment Sense

Contact our team of advisers today:

0115 933 8433

info@investmentsense.co.uk

Online enquiry form

Who will lose the benefit?

Where a household has one person with income above £60,000 per year, child benefit will be withdrawn completely.

If no one in the household earns more than £50,000 per year then the child benefit payments will continue unchanged.

For households where one person earns between £50,000 and £60,000 per year, the benefit will be withdrawn on a sliding scale; 1% of the child benefit will be withdrawn from every £100 of earnings above £50,000.

For simplicity we have referred to ‘income’, however the definition of income isn’t straightforward. HMRC are using something known as ‘adjusted net income. This means that all sources of income, including employed earnings, dividends, benefits in kind, net profit for the self-employed, savings interest and rental income is included.

However, payments such as pension contributions, charitable donations and childcare vouchers are then deducted, which may help to reduce your income below the £50,000 or £60,000 thresholds.

People should be careful when working out whether they are caught by the new rules; it isn’t always obvious whether or not someone is affected. For example, someone with a basic salary of £48,000 could be affected, because their benefits in kind push them above the £50,000 limit. Conversely a parent with a basic salary of £55,000 may continue to receive child benefit in full because pension contributions reduce their ‘adjusted net income’ below £50,000.

How will the new system work?

As you’ve probably worked out, the new system is far from simple and the complexity continues here.

You have two options; the first is to opt out of receiving child benefit altogether. This option is only really applicable to you if you have ‘net adjusted income’ over £60,000, because if you earn between £50,000 and £60,000, not all of the child benefit you receive, will be clawed back.
If you have ‘net adjusted income’ above £60,000 and wish to opt out of receiving child benefit payments altogether, you have until midnight on 6th January to do so. If you miss this deadline you will still be able to opt out, you will just have to pay a tax charge from the 7th January until the date you finally opt out.

For people who don’t opt out, which will mostly be those with ‘net adjusted income’ between £50,000 and £60,000, the government has decided that rather than simply stopping child benefit payments, they will continue to be paid in full to everyone. The appropriate percentage will then be clawed back through the self-assessment tax system, via the introduction of the High Income Child Benefit Charge.

Anyone affected by the new rules, will therefore need to complete a self-assessment tax return, even if they had not previously needed to do so. Indeed one of the main criticisms of the new system is that it is dragging  up to half a million people into the self-assessment tax system, which will undoubtedly increase the burden on an already overworked HMRC.

Those people affected will need to complete their first tax return by 31st January 2014, which will cover the period from 7th January 2013 to 5th April 2013.

Will it affect me?

If you have children and someone in your household has ‘adjusted net income’ of more than £50,000 in the current tax year the changes will affect you.

Clearly each family’s circumstances will be different, but some more common examples will include the following. For simplicity we have referred to ‘earnings’ when in fact we of course mean ‘adjusted net income’.

I earn less than £50,000 but my partner earns £55,000. You will continue to receive child benefit and your partner will need to complete a self-assessment tax return and will be liable to pay the High Income Child Benefit Charge, which will claw back a proportion of the child benefit.

I earn less than £50,000 but my partner earns over £60,000. Your partner will be liable for the High Income Child Benefit Charge, which will claw back 100% of the child benefit paid to you. You could also opt out of receiving child benefit altogether

My partner and I both earn less than £50,000. You will still receive the full amount of child benefit, however, if one of you starts to earn more than £50,000 during a tax year you will need to inform HMRC and will be partially liable for the High Income Child Benefit Charge.

My partner and I both earn more than £50,000. The partner with the highest income will be taxed, even if the child benefit has been paid to the other partner.

I earn less than £50,000 and my partner does not live with me. If you partner has not lived with you during the tax year in question, the changes will not affect you and you will continue to receive child benefit in full.

How many people will be affected?

Estimates vary, but HMRC has said that just over one million families will be affected, with around 700,000 families losing their child benefit completely. Furthermore an additional 500,000 people will have to complete self-assessment forms.

Can I do anything to avoid being affected?

HMRC use your ‘adjusted net income’ figure to calculate whether the changes affect you or not; there are a number of things you could do to reduce your ‘net income’. The most popular option is likely to be additional pension contributions, which of course will also qualify for tax-relief and may receive a further boost from your employer if you are a member of a work place pension.

Other ways of reducing your ‘adjusted net income’ figure include buying more holiday or childcare vouchers under salary sacrifice schemes or indeed making charitable donations.

What action should I take now?

If you have not already done so there are a few simple steps you should take immediately;

1. Work out whether you or your partner has ‘adjusted net income’ above £50,000 and will therefore be affected by the new rules. Click here  to use HMRC’s online calculator

2. If you or your partner has ‘adjusted net income’ above £60,000 consider whether you want to opt out of receiving child benefit altogether. You can do this by clicking here

3. Start to budget. If you or your partner has ‘adjusted net income’ of between £50,000 and £60,000, then unless you have opted out, you will continue to receive the full amount of child benefit, but will have to repay a proportion when you complete your self-assessment tax return.

Unless you budget carefully, this could lead to you spending the money which is due for repayment. Many people are planning to pay the child benefit into a normal savings accountregular saver account  or instant access Cash ISA (Individual Savings Account), receive some interest, and then withdraw whatever amount is needed to be repaid when the self-assessment is complete.

This option may or may not work for you, but do budget carefully, you don’t want to be hit with an unexpected bill next year, having spent the child benefit

4. Look at ways of reducing your ‘adjusted net income’. One very effect way of doing this is to increase pension contributions, which will attract tax-relief and may be increased by your employer, if you are a member of a work place pension

5. If your income, or that of your partner, is above £50,000, then you will need to have a conversation about how these changes will affect you. Why not use it as an opportunity to review your finances in more detail?

The changes to child benefit are hugely complex and without doubt controversial. Whether you agree with them or not, if you have children and you or your partner earns around £50,000 or more, you will be affected.

Now is the time to investigate exactly how much the change will cost you and plan how you will cope.