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Higher rate taxpayers set to lose child benefit
12:38pm Wednesday 31st October 2012 in Business: Personal Finance
FOR some “better-off” families, January 7 next year will see the introduction of changes to the Child Benefit system, which could see a significant reduction in their household income.
The universal children’s allowance is one of the three pillars of the welfare state outlined by William Beveridge in 1942.
Originally known as Family Allowance, mothers received a weekly payment from the state for their second and subsequent children irrespective of family income. This complemented the child tax allowance, which had been introduced in 1911.
In 1981, both Family Allowance and child tax allowance were replaced with Child Benefit, which was paid for each child, including the first, and has continued as a non means-tested, tax-free benefit.
At present, the payments are £20.30 a week for the first child and £13.40 a week for the second and subsequent children.
Payment is made for the benefit of all children under the age of 16, but can continue to age 20 should they remain in qualifying education or training.
From January 7, the benefit will, effectively, become means-tested. From that date, families with at least one parent with earnings of £50,000 or more will lose benefit on a graduated basis until it is completely lost where at least one parent earns £60,000 or more.
Herein lies the first anomaly and perceived injustice as the rules look at each individual parent’s income rather than combined household income, eg if both parents earn £49,000 a year, they will continue to qualify for Child Benefit as now. However, where one parent earns more than £60,000, even where the other has no income, they will lose their Child Benefit.
The definition of income for these purposes is “adjusted net income”, which includes salary, overtime, bonus, benefits in kind and un-earned income such as savings income.
The assessment is made on single parents and on people living as a couple. This includes two adults in a household with children whether the adults are married, unmarried or living as civil partners.
For households facing a reduction in Child Benefit, the means by which it will be achieved is by charging additional Income Tax on the adult whose earnings exceed £50,000.
Child Benefit will, therefore continue to be paid, but will be clawed back using the Self- Assessment tax return and payment system.
The additional administration this will entail can be avoided by choosing to opt out of Child Benefit completely.
However, this could present problems, for example if the high earner were to lose their job or suffer a reduction in income due to redundancy or to a reduction in working hours.
Additionally, opting out could create a problem for the non-earning or lower paid adult as they may lose entitlement to National Insurance credits they might otherwise receive while claiming Child Benefit.
If they opt out, there is no official record of them caring for children and no entitlement to NIC credits, which will affect entitlement to State benefits and potentially reduce the size of their state pension.
Consequently, for households affected by the changes the best option may be to remain opted in to the Child Benefit system and put up with the hassle of extra paperwork and extra tax.
Of course, it will make sense to examine whether the amount of tax due can be reduced or even eliminated completely be taking steps to reduce the adjusted income amount.