Child benefit: a quick PSA…

There’s been a certain amount of confusion on Twitter this evening (partly helped along by me, alas) as to how the child benefit cuts will work. George Osborne announced yesterday that, rather than people losing the whole of their child benefit if one parent earns more than ~£40,000, now child benefit will taper down for earnings between £50,000 and £60,000.

HMRC have published an FAQ on this, which caused some confusion through its use of the phrase “net income” – leading some (including me) to think it meant net income after income tax. However, a more detailed technical note (PDF) explains what this term means:

The measure of income that will be used will be the individual’s adjusted net income. This is an existing method of determining an individual’s income and is currently used to work out entitlement to personal allowances for someone aged 65 or over or who has income over £100,000.

Adjusted net income is calculated in a series of steps. The starting point is “net income” which is the total of the individual’s income subject to income tax less specified deductions, the most important of which are trading losses and payments made gross to pension schemes. This net income is then reduced by the grossed-up amount of the individual’s gift contributions and the grossed-up amount of the individual’s pension contributions which have received tax relief at source. The final step is to add back any relief for payments to trade unions or police organisations deducted in arriving at the individual’s net income. The result is the individual’s adjusted net income.

See? Almost too simple. ;-)

The other aspect is how the clawback will work. Rather than actually means-testing child benefit, it sounds like child benefit will continue to be paid in full, but then there’ll be an additional tax charge for the partner who is earning over £50,000, to claw back some or (if they are earning over £60,000) all of the benefit paid.

Which means those who are affected will now (a) have to complete a tax return, if they didn’t already (oh, joy!), and (b) if earning between £50,000 and £60,000, face a marginal tax rate of 50% – which apparently was too much for those earning above £150,000 to bear without fleeing the jurisdiction. Sadly, a “net income” of £50,000 to £60,000 won’t buy you much of a Swiss bolthole.

Also, it’s not clear to me how the tax charge will be payable. On the face of it, it sounds like affected taxpayers will have to dip into their pockets to find the money to pay back the previous year’s child benefit – a cool £2,500 if (to choose a random example) you have three children. Though I assume that after that it can be run through PAYE for future years, and for the current tax year it’ll only be the last three months’ child benefit that is clawed back. Still quite a shock to the system for those who find themselves caught in the taper by a promotion or a pay rise.

If this makes you think “total shambles and/or huge political row waiting to happen”, well, you’re not the only one. Even if, admittedly, those who are affected by this are less in need of people’s sympathy than those hit by the spiteful cuts to working tax credits.

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10 thoughts on “Child benefit: a quick PSA…

  1. So to reduce your “net income”, make some pension contributions and/or some charitable donations with gift aid, both with 40% tax relief. You can even gift aid clothes and other used items these days to charity shops, which you maybe would have donated anyway, reducing your tax bill and now enabling you to keep some/all of your child benefit.

    Play the game.

    • Indeed. I’m sure MoneySavingExpert.com will have a full how-to on this before the week’s out. ;-)

      But it doesn’t take away the fact that Osborne has stored up quite a problem for himself down the road. Not least because, by my calculation, the first big bills for reclaiming a whole year’s child benefit will be payable in January 2015 – shortly before the scheduled date for the next election…

      • I like your point about the timing of the next general election!

        Regarding trying to reduce your income in order to be able to claim more CB, sadly because of the taper, this is not going to be as effective as it would have been for people affected by the original plans, i.e. those just over the 40pc threshold. For example, for every £100 extra you pay into a pension scheme you will only be able to rescue 1% CB. Who knows what will happen to your pension in future? Surely not get raided by the government?! And of course those paying 40pc tax are only entitled to £28 a week childcare vouchers compared to basic rate payers who get nearly double so it just seems there is nothing much we can do unlike those who under the orignal plans who would have ended up thousands of pounds better off by taking these measures. (I hope I’ve got all this right. I’m only a worthless stay at home mom).

  2. As you might imagine, my heart bleeds for people in the top decile who might have to face higher withdrawal rates. ;-)

    The potted version of adjusted net income in that document was clearly written by an imbecile: it’s accurate, but there’s a far clearer explanation in another document (.pdf), together with five worked examples.

    Though I assume that after that it can be run through PAYE for future years

    Yep. Reduced thresholds can normally deal with this kind of thing. If you owe the Revenue £2,500, then your personal higher rate allowance just gets pulled down by £6,250 (£2,500/0.4), and you automatically repay them throughout the following tax year. I’m used to this kind of arrangement: as a legacy from my days of drifting in and out of tax, it’s how we handle my savings interest. (I just send them a letter every year: no need for the full-blown self-assessment form.) Obviously you’d prefer not to be paying it at all, but if this is how they administer it then it’s at least not bureaucratically onerous.

    If we’re playing the ‘I wouldn’t start from here’ game, though, I do wonder why the Chancellor didn’t announce that CB would be taxable and simultaneously increase the value of the benefit by the tax raised.

    • Indeed. No-one’s expecting sympathy here, but I think there is an interestingly shambolic situation lying ahead: lots of potential (and indeed actual) Tory voters having to repay their child benefit shortly before a general election, Daily Mail up in arms…

      • Yeah, but not ‘writing a cheque’ repay, as far as I can tell: only ‘having your allowance decreased’. Or did I miss something in the papers?

        5m HRTs by 2015 with 10m Tory votes cast at the last election: has anyone studied voting intention by tax band? There are plenty of left-leaning HRTs of course. (I was going to cite the readership of the Guardian, but just realised that they don’t qualify as ‘plenty’.)

      • I suppose it remains to be seen how it’ll work. But the clawback is effective for CB paid from 7 January 2013, and the period to 5 April 2013 will then be covered by the tax return that isn’t sent out until April 2013 and submitted to HMRC by, what, October? Presumably that tax would be repayable as a lump sum in January 2013.

        The question is then how quickly it can get switched over to PAYE. By the time the first return is submitted, people will have already received six months’-worth of CB in the 2013/14 tax year. So I don’t see how it could switch over to a PAYE basis until 2014/15 at the earliest – which would mean either handing over a cheque in January 2015, or spending 2014/15 having both that year’s CB and the previous year’s deducted over the course of the year. Ouch!

        Either way: Tory MPs will be making the same calculations, and will be acutely conscious of what a headache this could become by the end of this parliament.

    • Yes, that timetable looks plausible. But I’m not sure whether you’d end up with a year paying double. It does all depend on implementation. It’s not implausible that people will simply repay in 2014/15 what they over-claimed from 12/13, and keep rolling this schedule forward. If I remember rightly, this kind of elongated timetable is what most stung about the last over-payment of benefit story (was it even child benefit?).

      It’s a potential shambles, I agree. But it’s also potentially administrable: it’s not a necessary shambles, at least not yet. (See? I love formal logic, too. ;-) )

    • Families in the top decile ARE NOT the top ten per cent richest families as this nasty government would have everyone believe. I wish. If child benefit entitlement was means tested fairly, i.e. on household income (net income would be even nicer) there is no way my family would come anywhere near this “top ten”.

      • Yes, indeed, there are clear inequities (as many have observed) between two-income families where each earner is on (say) £40,000 or so and families with a single earner on more than £50,000; and having a top-decile earner doesn’t necessarily make you a top-decile household (welcome to my world, basically). That said, I think Phil’s point is valid, that those of us who are affected by these changes, while we may not feel like we’re rolling in cash, are (all things being equal) rather better off than most people in the population.

        But there is a wider point about the perverse incentives that the government are building in to the system. We’re told that it is intolerable for those earning more than £150,000 to be taxed at 50%, as it will discourage them from striving to earn more. However, the government’s changes are projected to increase the number of 40%-rate taxpayers to over 5 million (up from 3 million in 2012, IIRC), thus sending out to millions of people the signal that if they earn a bit more money, the government is going to wallop them – while cutting taxes for the richest.

        Even worse are the working tax credit changes which seem likely to put 200,000+ people in the position of being better off going onto the dole than staying in work, a situation which seems utterly irreconcilable with this government’s supposed agenda.

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