Child benefit and high income – when it becomes a liability
Child Benefit and high income – beware the dreaded HICBC!
A typical two parent, two child family can claim £35.00 per week in Child Benefit. In a tax year this would amount to £1,820. But there are complications when it comes to child benefit and high income.
Often, this becomes part of the family housekeeping and is spent.
Consider Mary and John and their two children.
John collects the Child Benefit which is paid into his current account and used to fund the household budget. John elected to stay at home and look after 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 net.
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 is the dreaded High Income Child Benefit Charge (HICBC).
The HICBC is 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, Child Benefit must be repaid at the rate of 1% of Child Benefit 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 bill included a £1,820 HICBC.
Reluctantly, Mary and John had to withdraw the £1,820 from their ISAs.
Mary thought that only ending up with £6,000 of her Gross £10,000 bonus was bad enough but she now realises that the true “tax” cost was £5,820 (£4,000 income tax and £1,820 HICBC). The combined tax hit was not 40% of her income but a whopping 58%!
Any parent who exceeds the £50,000 income limit for the first time and draws Child Benefit will find themselves in a similar position to Mary and John and will need to plan accordingly.
Please contact our tax team at THP if you require more details but please note that we are unable to offer a free advice service.
About Karen Jones
Having worked for one of the world’s largest accountancy firms, Karen Jones uses her tax knowledge and skills to help clients obtain substantial reductions to their tax liabilities.
With an expanding portfolio of tax clients, Karen enjoys the variety her work brings her and particularly likes working with new businesses and people. With a growing number of tax clients, she frequently faces a variety of challenges and relishes the experience she gains as she solves them.
Karen likes the THP ethos: “I like the way the team has a professional, but friendly and down-to-earth approach – it creates a productive atmosphere that benefits everyone.”
Karen’s specialist skills:
- Personal Taxation
- Tax Efficient Planning
- Trust Administration