The effects of the recent Budget on the High Income Child Benefit Charge
In his recent Budget, the UK Chancellor Rishi Sunak announced no changes to the rates of income tax in 2021/2022. The income tax personal allowance increased from £12,500 to £12,570 and the higher-rate tax threshold increased from £50,000 to £50,270.
What impact, if any, does this have on the High Income Child Benefit Charge (HICBC)?
The HICBC came into being on 7 January 2013 and is based on ‘adjusted net income.’ Generally, this is total taxable income before deducting any personal allowances but after deducting certain payments that qualify for tax relief, such as any grossed-up pension contributions that have received relief at source and gross Gift Aid payments.
The HICBC applies where a person is in receipt of child benefit and they have adjusted net income of more than £50,000. The amount of the charge is a 1% deduction from the amount of child benefit for every £100 of income that exceeds £50,000, up to £60,000. Therefore, someone with adjusted net income of £55,000 would effectively have to repay half of the child benefit they received for the year.
On 12 April 2021, child benefit increased from £21.05 to £21.15 per week (£1,100 a year) for an eldest/only child and from £13.95 to £14.00 per week (£728 a year) for each additional child.
And even though from 2021/2022 we will see a slight increase in the higher rate tax band of £270, the HICBC will still be payable once adjusted net income exceeds £50,000, so for the first time could have an impact on basic rate taxpayers, who would otherwise not have been affected by the charge.
Since the introduction of the HICBC, the higher rate tax threshold has increased broadly in line with inflation, but the statutory £50,000 threshold for the HICBC has remained static from inception. As a result, due to its complexities and given it will now affect some basic rate taxpayers, some individuals may decide to stop receiving payments. It is, however, vital that clients understand that there are planning opportunities available that can maximise the potential to avoid the HICBC.
For example, adjusted net income will be reduced by the payment of a grossed-up pension contributions, which may mean that less HICBC is payable. Furthermore, clients should appreciate the other benefits of claiming child benefit, namely:
- The ability to qualify for National Insurance credits, which count towards the state pension.
- The ability to qualify for other benefits, such as Guardian’s Allowance.
- Juvenile registration, which is the process whereby children are automatically allocated a National Insurance number shortly before their 16th birthday.