Tax warning: Child Benefit claimants may need to take action this month or face penalty
Martin Lewis explains who is eligible for Child Benefit
While there isn’t means-testing as such when it comes to Child Benefit, it may be a person is liable to pay tax on the payment via the HICBC. This may need to be paid if a person has an individual income of more than £50,000, and certain circumstances apply.
The government explains these when the “high income” individual either:
Gets or their partner gets Child Benefit
Someone else gets Child Benefit for a child living with you and they contribute at least an equal amount towards the child’s upkeep.
It doesn’t matter if the child who lives with the person isn’t their own child.
Should an individual be affected by the charge, it may be that they choose not to get Child Benefit payments, and hence don’t need to pay the charge.
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Otherwise, they may get the payments, and need to pay any tax charge there is at the end of each tax year.
To pay the tax charge, the person must register for Self Assessment, and fill in a Self Assessment tax return each tax year and pay what they owe.
Kay Ingram is the Director of Public Policy at LEBC Group and a chartered financial planner, and she has commented on the importance of being aware about the tax charge – and what it means for households.
“Parents of children under 16, or under 20 if in education, are entitled to Child Benefit and can claim £21.05 per week for the eldest child and £13.95 per week for each younger child,” she explained.
“For most parents this is a tax-free benefit.
“However, if one adult in the household has income of more than £50,099 tax is payable on the benefit at a rate of one percent for each £100 of income over £50,000 so that once the income reaches £60,000 the whole benefit is taxable.
“This tax must be paid by the adult whose income is over the threshold and applies whether they are the parent or not.”
Ms Ingram highlighted a number of important deadlines relating to HICBC.
“New parents and those whose income exceeds £50,099 for the first time, who are taxed under PAYE, have until October 5 of the tax year following the end of the year in question to notify HMRC so that the extra tax can be collected by adjusting their tax code,” she said.
“For the year 2019/20, ending April 5, 2020, taxpayers had until October 5, 2020 to make that notification.
“If they have not done so then the extra tax due must be notified to HMRC via self-assessment and paid by January 31, 2021.”
Failing to meet the deadline at the end of this month could incur a late penalty charge.
The chartered financial planner explained that for some, there are ways to legally avoid the charge, with one option in particular enabling the person to still benefit from their income during their lifetime. This is by making pension contributions.
“Parents with income substantially above £60,000 may choose to waive payment of the child benefit to avoid having to report and pay the tax,” commented Ms Ingram.
“Those whose incomes are above £50,099, but below £60,000, can still receive a proportion of the benefit tax free and can even increase their entitlement to tax free Child Benefit by making pension savings or donating to charity.
“Each £1 saved in a pension plan or gifted using gift aid reduces the income that counts towards the threshold in addition to providing tax relief at 40 percent.
“For example, Georgia has two children and would normally be entitled to tax free Child Benefit of £1,855 per year. Her income is £52,000 so she owes tax of £371 on the Child Benefit.
“If she saves £2,000 in a pension plan, she will eliminate the child benefit tax charge and receive £800 of tax relief on her pension savings, so that her £2,000 of pension saving only costs her £829.
“Donating to a charity would also achieve the same result.
“Those higher rate taxpayers who are enrolled in workplace schemes may find that they have relief to claim if their scheme is not funded by a salary sacrifice.
“Employees whose schemes operate a relief at source or net pay arrangement can deduct their own pension contributions from their gross pay when assessing their liability for child benefit tax.
“It is too late now for parents to make a pension contribution or gift aid donation to be offset against tax due for 2019/20 and this must be paid by January 31, 2021 but saving into a pension between now and April 5, 2021 will restore the tax free benefit for the current tax year.
“This may enable those who have waived Child Benefit so far to reclaim it.”
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