What is the child benefit tax charge?
The child benefit tax charge is a tax charge which recovers up to 100% of any child benefit received by a high-income earner or their partner. It is collected via an individual’s Self-Assessment tax return and is payable by 31 January following the end of the tax year.
So, for example for the tax year ended 5 April 2017 the child benefit tax charge would be payable by 31 January 2018.
Who will be liable for the child benefit tax charge?
The charge applies where either you or your partner receive child benefit and one of you has adjusted net income of over £50,000 per annum for the year concerned.
What is adjusted net income?
Your adjusted net income for the tax year is your total taxable income including employment income, self-employed income (net of trade losses), rental and investment income plus other taxable benefits. In calculating your taxable income you also make the following adjustments:
- Deduct the gross amount of any charitable donations made under Gift Aid. For example, you make a donation of £80 net of basic rate tax relief during the tax year - the gross amount is £100 (£80 plus basic rate tax relief of £20).
- Deduct the gross amount of pension contributions where these have been paid net of basic rate tax relief. For example, you make pension contributions totalling £800 - the gross amount is £1,000 (£800 plus basic rate tax relief of £200).
- Add back payments to trade unions or police organisations (if appropriate) that were deducted in calculating your net income for the tax year.
How is the child benefit tax charge calculated?
The child benefit tax charge works by reclaiming a percentage of the Child Benefit you received. The recovery is tapered so that it applies to earnings between £50,000 and £60,000.
The Child Benefit tax charge is calculated by reclaiming 1% of the Child Benefit received for every £100 of income between £50,000 and £60,000. The charge will never exceed the total Child Benefit received.
You can use the child benefit tax charge calculator here to work out any payment due.
If you earn over £60,000 you can elect to no longer receive Child Benefit and so you will not be required to make the calculation.
You can revoke this election by making a claim online. Benefits are normally reinstated from the week commencing after the claim is made. Benefits may also be reinstated for the previous year provided that notice is given within two years of the end of the relevant tax year and no benefits were received in that year and no other person would have been liable to the child benefit tax charge in that year.
Are there any ways I can avoid the child benefit tax charge?
There are a number of tax planning ideas you can use to help prevent this withdrawal, for example:
- Make personal pension payments to reduce your net adjusted income for child benefit purposes to below £50,000 (the point at which the child benefit tax charge starts)
- If you run your own company, reduce your dividends so you can reduce your income to below £50,000.
- Depending on your spouse’s income, it may be worth transferring some of the dividends or salary from your company to your spouse.
- If your income is normally close to £60,000 then it may be worth taking larger dividends from your company to lose the benefit completely and less in other years to keep your income less than £50,000.
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