I have to say that the rules for this new child benefit tax charge are the most complicated I have seen and a huge challenge for me to explain in simple terms. Not only that, but also the most bizarre and random date for implementation has been chosen (7 January 2013 – part way through the month and almost at the end of the current tax year), without any obviously explanation. So much for the Government promising tax simplification and even launching an office devoted to that purpose!
What are the changes?
A tax charge will apply where one or other partner in a relationship earns more than £50,000 a year and where they or their partner receives child benefit.
The tax charge applied will be 1% of the full child benefit for every £100 of income over £50,000. It will be charged to the person with the income that exceeds £50,000 – regardless of whether they are the one who receives the child benefit.
It seems rather unusual for a taxpayer to suffer a tax charge as a result of someone else receiving income!
The tax charge on a taxpayer with income of more than £60,000 will be equal to the amount of the child benefit and at this level the advice is for the taxpayer or their partner to opt out of receiving child benefit.
However, the advice is that you should still register for child benefit to ensure that National Insurance credits are received, where applicable, even though you would opt out of receiving payment of the benefit.
When will you be charged?
The full amount of income for the tax year 2012-2013 will be taken into account and the amount of child benefit will be that paid from 7 January 2013 to the end of the tax year being 5 April 2013.
In subsequent years, the full amount of child benefit and full income in a tax year will be taken into account. The tax due for 2012-2013 will be paid in the tax year 2013-2014, so the taxpayer will always be in a catch-up situation.
There are many practical issues associated with this tax charge system. First of all, how does HMRC know who will be caught by the scope of this brand new tax charge? It promises to write to taxpayers, but it will be your responsibility to inform HMRC that you or your partner earn above £50,000, are in receipt of child benefit and complete a self-assessment tax return.
Circumstances change over time, of course. As and when this happens you will have to keep HMRC updated on your personal relationship changes if the changes affect the tax charge you incur. Not only that, but there is also clearly an expectation that everyone knows their partner’s income. I am not sure that this is always the case.
All in all, this seems like an administrative nightmare waiting to happen, although I do hope I’m proved wrong!
Using 20 years' experience spent working at some of the UK's leading businesses, award-winning chartered accountant Elaine Clark is the founder and managing director of www.cheapaccounting.co.uk.