High income child benefit charge – getting the details right
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
7 August 2023
As the government looks at changing the administration of the high income child benefit charge (HICBC), we look at the details and consider other topical issues for tax practitioners to discuss with their clients.
High income child benefit charge (HICBC) applies where a taxpayer has an adjusted net income of more than £50,000, and either they or their partner receive child benefit for at least a week in the tax year. The charge currently applies to the partner with the highest adjusted net income, and it’s normally necessary for them to register for self-assessment to settle the tax payable.
HICBC applies a percentage charge based on the adjusted net income above £50,000 of the higher earning partner, with child benefit being withdrawn in full where adjusted net income reaches £60,000.
Our article marking the tenth anniversary of HICBC reviews the legislation which brought in the charge, as well as some of the practical issues for tax practitioners to consider. There are however a few more recent developments for tax practitioners to be aware of when advising their clients.
Announcement on legislation day (L-day) 2023
In her written statement on 18 July 2023, Victoria Atkins (Financial Secretary to the Treasury) outlined plans to simplify the payment of HICBC, with particular reference to those who need to register for self-assessment specifically to pay the charge. She announced that the government plans to enable taxpayers to pay their HICBC liability through their tax code.
Many taxpayers are still unaware of the HICBC rules, even though the charge has now been in operation for over ten years. Although details are still to be announced, this proposed plan should hopefully avoid taxpayers receiving penalties for not registering for self-assessment purely for the purposes of paying HICBC.
As the HICBC threshold has remained unchanged at £50,000 since its inception, not keeping pace with rising incomes will mean that more taxpayers in households claiming child benefit will find that they will be brought into the charge. Being able to settle the HICBC liability via the PAYE system should therefore be seen as a welcome step. Especially at a time when HMRC is experiencing resource pressures and there may be additional taxpayers in self-assessment, due to factors such as the reduced capital gains tax annual exempt amount and the freezing of other tax thresholds.
The use of the PAYE system appears to offer an alternative in situations where a taxpayer’s circumstances are relatively straight-forward. However, it might be more challenging for the PAYE system to handle situations where a taxpayer’s adjusted net income is altered by deductions such as gift aid or pension payments. Once the government makes a further announcement on their plans, we’ll be able to look at circumstances like this in more depth.
The importance of still making a child benefit claim
For those households affected by HICBC, there might be the temptation to simply not claim child benefit at all. However, taking this approach can be detrimental to the child benefit claimant’s national insurance credits for the purposes of state benefits.
While it seems bureaucratic, claiming child benefit but electing to not receive payments will, in many cases, be far more beneficial in the longer term as it allows the claimant to accrue national insurance credits. As time progresses, the consequences of individuals not claiming child benefit could become more significant, particularly where they do not have sufficient credits to receive a full state pension.
We have become aware of cases where the parent deciding not to claim child benefit due to HICBC has had an effect on an ‘eligible family member’s’ (below state pension age) ability to claim specified adult childcare credits when they have looked after a child aged under 12. This typically occurs where a grandparent looks after their grandchildren, but could also include a parent who does not live with the child, a great-grandparent, a great-great-grandparent, brother or sister (including half-brother, half-sister, step-brother, step-sister and an adopted brother or an adopted sister), aunt or uncle.
A child benefit claim can normally only be backdated three months. Where HICBC could be an issue, the simpler ‘belt and braces’ solution will be to recommend to a client that they make the claim and elect to not receive payments. This route also enables them to revoke the election to start receiving child benefit should a household’s circumstances change.
When a child reaches 16
Parents and carers with a child aged 16 and 17 need to notify HMRC if the child continues to be in full-time education or training. If they do not do so, child benefit payments will stop on the 31 August on or after the child’s 16th birthday.
There is now the ability for the child benefit claimant to extend their child benefit online or in the HMRC app. The same form can also be used if the child is aged 18 or over in approved education or training. Where changes have been made, parents and carers will see those changes applied to their child benefit claim immediately in their proof of entitlement.
A recent HICBC case with an unpredictable outcome
The Meodes case (TC8844) saw a change of circumstances have an unexpected liability to HICBC.
The taxpayer and his wife had a child in December 2012. The father claimed child benefit, but the payments were paid into the mother’s bank account. The couple separated in July 2017. The child and mother continued to stay in what had been the family home, and the father provided financial support for the child. After they divorced in April 2019, the taxpayer married again in November 2019 and lived with his new wife during the whole of the 2019/20 tax year.
HMRC raised an assessment on the taxpayer for the 2019/20 tax year as it was felt that a HICBC liability had arisen through condition B of section 681B ITEPA 2003. This applies where the partner of a taxpayer with adjusted net income of above £50,000 received the child benefit. The First Tier Tribunal rejected this argument as the mother of the child was not the taxpayer’s partner in the 2019/20 tax year, due to the fact that he had remarried and was living with his new wife.
Before there was any cause for celebration by the taxpayer, the tribunal explored whether condition A of section 681B applied. Notwithstanding that the child lives with the mother, the judge considered whether HICBC would apply if the taxpayer was entitled to child benefit in 2019/20 and if his adjusted net income was higher than the adjusted net income of his new wife.
As the taxpayer’s adjusted net income was higher than his new wife, the tribunal looked at whether he was entitled to child benefit. Whilst the child lived with the mother, the taxpayer was also entitled to child benefit as he provided financial support for the child. As he had been awarded child benefit, his entitlement was treated as having priority over the mother’s entitlement.
Ultimately, or very different reasons to those argued by HMRC, the tribunal decided that because the taxpayer had been entitled to child benefit he was therefore liable to HICBC. It is perhaps unfortunate that this would not have been the case if he had cancelled his claim to enable the mother to make a new child benefit claim instead.
Let us know your views
We welcome members’ input to inform our work on consultations or other tax-related matters – email us to share your insights and feedback. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by members.