From 7th January 2013 Child Benefit entitlement has been withdrawn on a sliding scale on those households where at least one of the individual’s adjusted net incomes exceeds £50,000 per annum. The entitlement is entirely withdrawn where at least one of their adjusted net incomes exceeds £60,000 per annum.
Whatever the Political rights or wrongs, from a tax perspective, it is clear that this has resulted in much unfairness and added complexity and it is easy to see how this will end up in a similar situation to the Tax Credits fiasco some years ago, where HMRC ended up writing off enormous amounts of overpaid Benefit.
One obvious anomaly is that a couple with incomes of £49,999 each, will obtain maximum Child Benefit whilst a single parent family earning £60,000 will lose all of the benefit. This hardly seems to be a move towards fairness.
The benefit entitlement is calculated weekly, so each taxpayer is expected to examine his income on a weekly basis and advise HMRC of any change in circumstances. Whilst this might be practical for an employee on PAYE, it is entirely impractical for a self-employed individual whose income fluctuates and may not actually know his level of profits until his accountant prepares his figures a year later. He therefore has the forced option of declining claiming the Benefit in the first place and potentially losing out or alternatively claiming it and later discovering that he has to pay several thousands of pounds back.
Any Child Benefit that has been over claimed will be recovered by a charge to income tax on the higher earning individual (whether or not they were the individual that received the benefit). It has been estimated that this has brought an estimated extra 500,000 individuals into self-assessment. This does not seem to fit well with the Government’s stated aim of simplification.
This legislation has led to some interesting situations, particularly where couples do not or will not discuss each other’s income levels. How is the recipient expected to know whether to continue to make the claim, when under individual taxation you are not entitled to know the tax affairs of your partner? HMRC have implied that, on request, they will release sufficient information to enable a taxpayer to understand if they can still claim the Benefit, but I struggle to see how this can be achieved without divulging at least, in part, details of the other taxpayer’s income.
Perhaps worse still, is the situation of the higher earner who discovers that at the end of the tax year he faces a tax liability on income he has not even received. This would be especially antagonising if the relationship had broken down in the meantime. It’s not difficult to see a case being brought on the grounds of Human Rights being far away.
Can anything be done to preserve entitlement to the Benefit? Certainly those in the position to defer or share income such as small business owners can take steps to ensure that their remuneration strategy maximises their entitlement. Pension contributions and Gift Aid are deducted in calculating the adjusted net income and are both useful planning tools. These are already conversations that we have had with a number of clients and you should be talking to your accountant about.