Child Benefit and Guardian's Allowance: Policy changes
This section of the website explains policy changes that have been announced for child benefit and guardian’s allowance.
Freeze on child benefit rates
Withdrawal of child benefit for higher rate taxpayers
High Income child benefit charge
- What is the charge?
- Calculating the charge
- Electing not to receive child benefit
- National insurance credits
Paying the charge
Action to take
Meaning of partner
Adjusted net income
- How many people are affected?
- Single earner/dual earner unfairness remains
- Other problems
- Further information
- Change to the way overpayments of Child Benefit and Guardian’s Allowance are recovered
In the June 2010 emergency Budget, the Chancellor announced that child benefit would be frozen for three years (2011/12, 2012/13 and 2013/14).
You can find the current and past child benefits rates in our ‘how much can your client get’ section.
At the Conservative Party conference in October 2009, George Osbourne announced plans to withdraw child benefit from higher rate taxpayers. He withdrew this proposal in the March 2012 Budget and replaced it with a proposed ‘High income child benefit charge’ which will come into effect from 7 January 2013 (see section below).
The cost and savings of this now obsolete proposal can be found in the Comprehensive Spending Review 2010 policy costings document. The House of Commons library produced a useful briefing paper Child benefit for higher rate tax payers which outlined the history of child benefit and the potential impacts of this change.
A number of problems and issues were raised with the proposal, including:
- The fact that a dual earner couple each earning just below the higher rate threshold would retain their child benefit in full, while a single earner couple or lone parent earning just above the threshold would lose it;
- The "cliff edge" problem whereby child benefit would be withdrawn completely at the higher tax rate threshold, with a potentially damaging impact on incentives;
- The scope for families to avoid the charge by “tax planning” or other means, including transferring the claim to someone outside the household;
- Administrative problems, including the need to link individuals’ tax records and child benefit records;
- The implications for independent taxation, including whether couples would be forced to disclose financial details and details of benefits received to each other;
- How to claw back child benefit – which paid on a weekly basis – through the tax system, where calculations are on an annual basis;
- How to deal with changes in circumstances over the tax year – eg where a partner moves in, or a couple split up;
- How to identify who is a higher rate taxpayer – eg where a person receives a bonus at the end of the tax year which pushes them above the higher rate threshold;
- How to determine whether two people are “living together” for the purposes of the charge – and when two people are to be regarded as no longer living together;
- How HMRC would ensure compliance with the new charge, and cost of doing so;
- The fact that the charge would be a “couple penalty” – eg it could be disincentive for a lone parent to move in with a higher rate taxpayer;
- The impact on women and children of the loss of an independent source of income, if they are encouraged by their partner to give up their claim for child benefit; and
- Implications for future entitlement to State pensions, given that people who are not in work and who are receiving child benefit for a child under 12 receive National Insurance credits.
The following documents, written by a range of people and organisations, also offered information about the potential impacts of the change and outlined concerns that the plans would be unenforceable in practice.
- Wall Street Journal Blog (October 2010)
- Gingerbread press release (October 2010)
- IFS Observations (October 2010)
- Low Incomes Tax Reform Group BBC article (October 2010)
- Child benefit and tax – uncomfortable bedfellows? (Low incomes tax reform group - January 2012)
- Withdrawal of child benefit for higher rate tax payers – problems ahead (revenuebenefits - Feb 2012)
- Withdrawing child benefit from better-off families: are there better options? (Chapter 11 from the January 2011 Institute for Fiscal Studies Green Budget)
- Save Child Benefit (Child Poverty Action Group briefing published in March 2012)
In the March 2012 Budget, George Osbourne announced plans to introduce a ‘high income child benefit charge’ which will come into effect from 7 January 2013.
The charge will apply to taxpayers who have an adjusted net income over £50,000 in a tax year, where either themselves or their partner are in receipt of child benefit.
If both partners have adjusted net income over £50,000, the partner with the higher income is liable for the charge (regardless of which partner is in receipt of child benefit).
The charge will apply at a rate of one per cent of the full child benefit award for each £100 of income between £50,000 and £60,000. The charge on taxpayers with income above £60,000 will be equal to the amount of child benefit paid. For example, child benefit for two children is currently £1,752 per year. For a taxpayer whose income is £54,000, the charge will be £700.80. This calculated as follows:
Step 1: £1752 child benefit divided by 100 = £17.52 (which is 1% of the child benefit award)
Step 2: £54,000 (adjusted net income) minus the £50,000 threshold = £4,000 of excess income
Step 3: £4,000 of excess income divided by £100 = 40 (the number of £100’s of excess income)
Step 4: £17.52 (1% of the child benefit award) multiplied by 40 (the number of £100’s of excess income) = £700.80
For a taxpayer whose income is £62,000, the charge will be £1752 (the full amount of child benefit paid).
An individual who has income above £50,000 but who is not receiving 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 income is less than their own. So if they were only living with the child benefit claimant for 3 months of the tax year they would effectively only pay one quarter of the annual amount of the charge.
For the tax year 2012-13, the first year of the charge, the amount of income taken into account will be the full amount of income for 2012-13 and the amount of child benefit will be that paid in the period from 7 January 2013 to the end of the tax year. For subsequent years, the full amount of child benefit and the income for the year will be taken into account.
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.
When the proposals were first discussed, there were some concerns about the interaction with national insurance credits that child benefit claimants receive if they have a child under 12 or are an approved foster or kinship carer. The HMRC Budget documents make it clear that people will still need to claim child benefit for each child even if they elect not to receive payments in order to preserve entitlement to these national insurance credits.
The charge will be collected through the self-assessment system and Pay As You Earn System. This means that the person liable to the charge will have to complete a tax return (possibly for the first time) and the amount owed will either have to be paid to HMRC by the appropriate deadline or may be able to be collected from the person’s earnings by adjusting their PAYE tax code. The Government expects that the number of individuals subject to Self Assessment will increase by up to 500,000 as a result of the measure. There have been some reports that HMRC may be able to recover the charge through PAYE without the charge payer having to complete a tax return although full details are not yet available. HMRC will be writing to taxpayers with income above £50,000 in Autumn 2012.
From early November 2012, around 1 million families will receive a letter together with an information sheet from HMRC telling them that they may be affected by the new changes to Child Benefit for higher income families that will come into effect from 7 January 2013.
Not everyone affected will receive a letter, for instance people who are self-employed or run their own business. This means they will need to check for themselves whether the changes affect them and either pay the higher tax charge or tell HMRC to stop paying Child Benefit.
Check if you're affected by the child benefit changes with this HMRC calculator
- Those affected who choose to carry on receiving Child Benefit payments will need to declare the amount of Child Benefit they or their partner receive, by registering for Self Assessment by 5 October 2013 (if they are not already registered) and filling in a tax return each year.
Self Assessment form can be downloaded from the HMRC website or call the Self Assessment Helpline on 0845 900 0444.
- Those affected who choose to stop receiving payment of Child Benefit, need to tell HMRC before 7 January 2013. They can use the self assessment form, or phone the Child Benefit Helpline on 0845 302 1444. Alternatively, they can write to: Child Benefit Office, Waterview Park, Mandarin Way, Washington NE38 8QG.
Anyone who has opted to have their Child Benefit payments stopped, can submit a request to have payments restart (for instance if their circumstances change) using the self assessment form
The legislation for this ‘high income child benefit charge’ is being introduced in the Finance bill 2012 (clause 8 and schedule 1). The Bill was presented to Parliament on 26 March 2012 and is expected to have its second reading debate on 16 April 2012. You can track the progress of this bill as it goes through Parliament on Parliament’s website.
Schedule 1 of the draft finance bill provides the following definitions:
Meaning of “partner”
(note this is the same as for tax credits)
(1) For the purposes of this Chapter a person is a “partner” of another person at any time if any of conditions A to D is met at that time.
(2) Condition A is that the persons are a man and a woman who are married to each other and are neither—
(a) separated under a court order, nor
(b) separated in circumstances in which the separation is likely to be permanent.
(3) Condition B is that the persons are a man and a woman who are not married to each other but are living together as husband and wife.
(4) Condition C is that the persons are two men, or two women, who are civil partners of each other and are neither —
(a) separated under a court order, nor
(b) separated in circumstances in which the separation is likely to be permanent.
(5) Condition D is that the persons are two men, or two women, who are not civil partners of each other but are living together as if they were civil partners.
(2) “Adjusted net income” of a person for a tax year means the person’s adjusted net income for that tax year as determined under section 58 of ITA 2007.
You can find information on how to calculate adjusted net income in HMRC’s Tax Information and Impact Note (TIIN)’.
It is expected that the revised proposal will affect approximately 1.2 million families, of whom 70% (790,000 couples and 30,000 lone parents in 2013-14) will lose the full amount of their child benefit. A further 330,000 couples and 20,000 lone parents affected by the charge in 2013-14 will lose a proportion of their child benefit. The average loss for those who lose is estimated at roughly £1,300 a year.
How many individuals are affected by the charge in future years – and the amount of additional revenue raised – will depend on the income limit and/or taper rate. The Finance (No.4) Bill provides for the Treasury to vary both the income limit and/or taper rate via a statutory instrument subject to affirmative procedure in the House of Commons.
Savings in 2013-14 are estimated at £1.5 billion and £1.7 billion a year in 2014-15.
The Government estimates that the additional cost to HMRC over the first five years will be £8-13 million for computer systems (development and running costs), plus approximately £100 million for staff resources, and £5 million for “customer information.”
The proposal does not address the single earner/dual earner problem – for example, families with a single earner on £60,000 a year will have the full amount of child benefit clawed back, while couples where both partners earn just under £50,000 will retain their child benefit in full.
The only way to address this problem would be to introduce some form of household means test. However, the Government has said repeatedly that it has no intention of doing so.
Individuals with an income in excess of £50,000 will be required to inform HMRC if they or their partner are in receipt of child benefit. However, it is not clear what would happen in the situation where someone either does not know, or claims not to know, whether their partner is getting child benefit. In the absence of a legal obligation on partners to share information on benefit receipt, it is unclear what HMRC will do.
Similar problems could emerge where both partners have an income in excess of £50,000. In this situation, the charge would apply to the partner with the higher income. To avoid the charge being applied twice, the partners would presumably have to share information with each other on their incomes and coordinate responses in their respective Self Assessment forms, or HMRC would have to implement some mechanism to link together individuals’ tax records to decide which partner is liable for the charge and avoid charging the same family twice.
Further difficulties might emerge where someone not expecting to come within the income bracket for the charge discovers at the end of the tax year that their income exceeded the limit (e.g. a self-employed person who, on preparing their accounts, finds that their income was greater than they expected, or an employee who receives a larger than expected bonus). HMRC would then apply the charge retrospectively, but in order to do so would have to have full details of the person’s cohabitation history for the year ended.
The “living together as husband and wife” test is will be the same as for tax credits, but its extension to the tax system raises a range of issues and could lead to complaints about intrusiveness. Furthermore, whether or not a “partnership” exists will have to be determined on an ongoing basis throughout the tax year, not just at a single point in time.
March 2012 Budget document
- Page 50 – costs and savings
- Page 64 – details
- HMRC website
House of Commons Library – Child Benefit for higher income families
BBC News Website
- CPAG website - Child Benefit: Chancellor should go further than partial U-turn
Child Benefit (ChB) is paid to around 7.8 million families at an annual cost of around £12 billion. At the end of 2010/11 the outstanding ChB debt balance rose to £35.59m for around 40,000 individual cases - up from £21.65m in 2009/10.
Where a person is overpaid Child Benefit or Guardian’s Allowance (GA) and it is as a result of either misrepresentation or the failure to disclose information by the claimant, whether fraudulently or not, the overpayment can be recovered from the claimant. When ChB and GA were transferred to HMRC, the provision to recover an overpayment of Child Benefit or Guardian’s Allowance from an ongoing award of one of these benefits was inadvertently lost. The provision in section 107 of the Welfare Reform Act 2012 re-enables overpayments of Child Benefit and/or Guardian’s Allowance to be recovered from future payments of these benefits.
This change has been in place since June 2012 and provides the powers to recover overpayments of ChB and GA directly from ongoing awards, in the same manner as other recoverable overpayments.
HMRC anticipate that between 4000 - 6000 ChB customers will have their overpayment of ChB and/or GA recovered by deductions from their ongoing award of these benefits.
Updated 3 May 2013