This change will affect around 1.2 million families. Approximately 70% of these households will lose all of their Child Benefit, and around 30% will lose a portion. The average loss for those that lose will be roughly £1,300 per year. It is estimated that 90% of families currently in receipt of Child Benefit will continue to receive some or all of their payments.
The tax charge
The income tax charge will apply to households (regardless of marital status) where a parent or partner has an ‘adjusted net income’ of over £50,000 a year. This is an existing method of determining an individual's income and is currently used to work out entitlement to personal allowances for someone aged 65 or over or who has income over £100,000. For further information on working out ‘net adjusted income’, see the HMRC website at http://www.hmrc.gov.uk/incometax/adjusted-net-income.pdf.
Where each parent or partner has an income of over £50,000, the charge will only apply to the person with the higher income.
For taxpayers with income between £50,000 and £60,000, the amount of the charge will be a proportion of the Child Benefit received. For taxpayers with income above £60,000, the amount of the charge will equal the amount of Child Benefit received. The amount of Child Benefit payable will be unaffected by the new tax charge.
The charge will be 1% of the amount of child benefit for every £100 of income that exceeds £50,000.
Based on a full tax year, child benefit for families with two children is currently £1,752. For a taxpayer whose income is £54,000, the charge will be £700.80, i.e. £17.52 for every £100 earned above £50,000. For a taxpayer whose income is £60,000 or more, the charge will be £1,752.
An individual who has income above £50,000 but is not entitled to Child Benefit themselves will only be liable to the charge for any period of the tax year during which they are living with a Child Benefit claimant whose own income is below £50,000.
Child Benefit itself is not being made liable to tax and the amount that can be claimed is unaffected by the new charge. It can continue to be paid in full to the claimant even if they or their partner have a liability to the new charge. Child Benefit claimants will be able to elect not to receive the Child Benefit to which they are entitled if they or their partner do not wish to pay the new charge. The claimant may subsequently decide to withdraw that election if they or their partner are no longer liable to pay the charge.
HMRC will be contacting people earning over £50,000 about the new charge from autumn 2012. The amount of the charge will be collected through self assessment and PAYE. Individuals who think they may be affected by these proposals do not need to do anything now.