The ‘Child Benefit Clawback’

The  ‘Child Benefit Clawback’ – or to give it its proper title the ‘High Income Child Benefit Charge’ –  coming in from January 2013 is probably one of the most ill-conceived tax measures put forward by any Government for a very long time. It is expected to bring in up to £2bn a year and is not, therefore, likely to be readily given up by this or any future Government, but the way it is being done has been heavily criticised. 

Respected members of the tax profession and even some high up within H M Revenue & Customs itself have pleaded with the Government not to introduce this measure in the way they are proposing, and to find some other approach to dealing with the issue. But the ears of David Gauke, Exchequer Secretary to the Treasury, and those of his bosses are deaf to their requests. Aside from the inbuilt unfairness in how it will work, from a practical point of view some have likened it to a car crash just waiting to happen……..and you can see why:

  • In households claiming Child Benefit where one of the breadwinners has taxable income of more than £50,000 there will be an income tax charge through the ‘Self Assessment’ tax return system to recover the benefit on a sliding scale – with 100% of the benefit being clawed back at income of £60,000 and over. 
  • A surprising number of individuals have income in that region – estimated at 4-5 million – of which, according to Government figures, about 1.2 million are expected to be directly affected, losing about £1,300 benefit on average per household per year. The more children the greater the loss.  
  • Letters will soon be going out to the 4-5 million inviting them to declare the position. HMRC estimates 0.5 million more tax returns will need to be submitted annually.
  • The biggest age group expected to be affected are the 51-65 year olds – who, if they have children, are more likely to be the high earners.
  • The marginal rates of tax suffered in the clawback zone will easily reach 60-70% depending on the amount of benefit  at risk.
  • For a couple – and it affects ‘common-law’ as well as married couples and civil partners – it is not joint income but simply where one of them has income over the threshold…….and of course that is often not going to be the claimant or even a natural parent of the child(ren). 
  • On the other hand, two partners having income of say £49,000 will not be affected.
  • Who is a partner of whom – and when – is going to cause a few complications –  and it turns the idea of independent taxation for married couples on its head.  
  • The main practical problem is that nearly half affected do not currently do tax returns – and while the Government believes it should be possible to collect the tax through PAYE for those on PAYE, several commentators have their doubts about this.
  • If someone does not already do a tax return they have until 5 October after the end of the tax year to let HMRC know.
  • It is up to the individual concerned to get it right – and there will be penalties for getting it wrong.
  • If tax cannot be collected via PAYE it could introduce those affected to the ‘payments on account’ system – where initially 150% of the tax bill has to be paid in January 2015. For two children this could be £2,628 – followed by another £876 in July 2015.This is just before the General Election – has the Government considered this? 
  • HMRC finds dealing with its existing post and telephone enquiries difficult enough and is not being given any extra resources to handle the influx that is expected from this. And to make matters worse, at the same time a new approach to PAYE is being introduced in 2013/14 that will stretch the system even further. 
  • Another problem is those whose income fluctuates or where there are retrospective changes. 
  • Benefit can be disclaimed if overall it would be easier and nothing would be lost – but it is important to make the claim for a first child and then only possibly disclaim it afterwards if the national insurance credit is to be preserved for the claimant (usually the mother) for the years in question.