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Reducing the Child Benefit Tax Charge

Newsletter issue - November 2012.

You may have received a letter from the Taxman about the high income child benefit charge (HICBC), which is designed to claw-back child benefit from high earners. We explained the principles of this charge in our September 2012 newsletter.

If you or your spouse/partner claim child benefit, and either one of you have income of over £50,000 per year, your family will be subject to the HICBC to claw-back part or all of the child benefit paid from 7 January 2013. The charge must be paid by the higher earner in the family irrespective of who actually receives the child benefit.

If you are the higher earner in the family, you will need to report the amount of child benefit the family receives on your self-assessment tax return. For 2012/13 this is only the child benefit received after 7 January 2013, but in future years it will be the full amount of child benefit received in the tax year. This will lead to a charge added to your tax bill due by 31 January 2014, or the charge may be collected through your PAYE tax code in 2013/14.

If you want to avoid paying the HICBC you and your partner/ spouse can:

a. elect not to receive child benefit from 7 January 2013; or
b. reduce the higher earner's adjusted net income.

You will be able to reverse the election in a) if your income drops, but you may miss out on some child benefit due to timing issues. Thus if your income is likely to be variable making an election not to receive child benefit is unlikely to be the best solution.

Your 'adjusted net income' could be reduced by using any or all of the following methods:

• Pay more personal pension contributions in the tax year. Make sure these contributions are paid by you and not by your employer.
• Increase the Gift Aid donations you make. Channel all the Gift Aid donations made by the family though the higher earner's bank account. Remember Gift Aid donations can be carried back to give relief in the previous tax year, if the donations are made before the tax return for that earlier tax year is submitted.
• Reduce the amount of income you extract from your own company and instead employ your spouse or partner in your business. This will spread the income generated by the business more evenly between you both.
• If you trade as a sole-trader you could take your spouse /partner into partnership, and again look to spread the income between you.
• Where you and your spouse/partner already trade as a business partnership, consider changing the profit sharing ratios so you each receive a more even amount of profit.
• If you are not domiciled in the UK you can adjust the amount of income you remit to the UK.
• If you are married and living with your spouse, you can transfer assets to your spouse that generate income such as shares, savings or let property. Transferring assets between individuals who are not married may well create a tax charge.

Please talk to us about how to undertake any of these planning ideas before trying to implement them to ensure they are appropriate in your own circumstances.