OCL: Changes to the high income child benefit charges and options to mitigate the charge

Among the fiscal updates announced in the April 2024 Budget were some positive measures for families. One was the long-awaited review of the high income child benefit charge (HICBC), which included both interim measures and a longer-term solution.

From 6 April 2024 an income tax charge applies to people who get Child Benefit and whose income (or partner’s income) is more than £60,000 in a tax year. The first rise since 2013.

Child Benefit isn’t means tested – it’s paid tax-free to most people with children, with no requirement to have paid National Insurance contributions at all. It’s important to note that Child Benefit itself isn’t being taxed or reduced – it will continue to be paid in full to the claimant. However, a tax charge will be calculated through a tax return on any partner whose income is more than £60,000 a year. If both partners have incomes over the £60,000 limit, the charge applies to the partner with the higher income. The tax charge will be one percent of the amount of Child Benefit received for every £200 of excess income. This is why the charge is the same as the Child Benefit received by people whose income is more than £80,000 a year. [(£80,000 – £60,000) ÷ £200 = 100%]

What can be done? The ‘income’ used by HM Revenue & Customs to calculate the charge is ‘adjusted net income’. Any pension contributions made by an individual, whether it’s a contribution to an occupational pension scheme or to a personal pension, will reduce the final amount of adjusted net income. If this is enough to get it below £60,000, the charge will be avoided; if it ends up between £60,000 and £80,000, the charge will be reduced.

Case study: Greg lives in England and has a taxable income of £68,000 and his wife Helen has no income. They have two children which results in Helen receiving Child Benefit of £2,212.60 a year, [(£25.60 + £16.95) x 52]. Since Greg’s income is £8,000 over the limit, he’ll face a tax charge of 40% of £2,212.60 = £885.04. As a couple, the overall value of the Child Benefit has therefore been reduced to £1327.56 (£2,212.60 – £885.04).If Greg makes net pension contributions totalling £6,400 in the tax year to a personal pension plan, this will be grossed up to £8,000. This means his adjusted net income falls to £60,000 and no charge is payable. By contributing £6,400, he’s saved £885.04. If all of the pension contribution lies in the higher rate tax band, he’ll also be able to claim an additional £1,600 in tax relief (20% of £8,000) through his tax return. So, his £8,000 pension contribution has in fact cost him £3,914.96 (£6,400 – £885.04 – £1,600).

For more information contact Tristan Wilcox-Jones, Samantha Gillham or Lucas Knight on 01225 445507.
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