Later this week, HMRC will also start writing to people who it believes will have income in excess of £50,000 in the current tax year and who may therefore be liable to pay the HICBC. It will probably have identified this population by cross matching data with that on people who claim child benefit (CB) at the same address. This means that some people may receive the letters and not actually need to pay the HICBC; conversely, some people who have to pay it, might not get a letter. It all depends on the quality of the data used and whether the make-up of the household has changed recently.
What is clear is that it is not primarily those who receive CB who will be written to, and yet it is these, usually mothers, who may need to take action before 7 January 2013 if they want to opt out of receiving the payments.
Section 8 and schedule 1, Finance Act 2012 set out the rules for clawing back CB paid to households where one or more of the spouses or partners earns more than £50,000. HMRC has been given the unenviable task of implementing a system to claw back CB based on rules we consider to be overly complex, unfair and which for some families will be unworkable.
CB is a non-means tested state benefit. We have said from the outset that we believe it is wrong in principle to use the tax system to apply what is in effect a means test to claw back the benefit at a later date, often from someone who did not receive personally the original CB. This problem is compounded further by the fact that since 1990/91 the UK has operated a system of independent taxation for individuals, whereas state benefits look at the position of a household. Many of the problems with this charge stem directly from the violation of this principle.
Calculation of the charge
The HICBC introduces escalating marginal rates of tax on income between £50,000 and £60,000. For every £100 of extra income over £50,000, the liable taxpayer must pay 1% of the benefit recipient’s CB for the year. This is on top of the 40% income tax and 2% NIC already due from someone earning £50,000 pa. For a typical family with two children, £100 of extra income equates to extra tax of £17.52. This is £33.70 CB x 52 weeks at 1%. This means that the effective marginal tax rate on that £100 of income is 59.5%. This is income tax of 40% plus NIC of 2% plus HICBC of 17.52%.
Another taxpayer with four children and exactly the same level of income will pay an extra charge of £31.46, a marginal rate of 73.5%. Once a family unit reaches eight children, (this situation might be rare but it could include, for example, two previously divorced or widowed parents, each with four children) the charge is £59.33 per extra £100, and the marginal rate of tax is 101.3%.
This will make it very worthwhile for taxpayers to try to reduce their income for the year, for example by making payments into a pension fund.
How will the charge be levied?
Where there is more than one person in a household with income over £50,000, the charge applies to the person whose income is higher. This person may in fact not be a natural parent of the children, and the couple may not be married, but this is irrelevant.
The letter to be sent to taxpayers (which we will publish on our website later this week) talks about a person having an ‘individual income’ in excess of this amount. Not everyone will understand that this has to be calculated and includes all sources of taxable income, not just earnings. There is a calculator on the HMRC website to help people work out what their individual income is.
The person with the higher income must ask for a self assessment tax return unless they already receive one. The first tax return affected will be for the current year, 2012/13, and will only have to show a HICBC for CB received after 7 January 2013. It will be payable by 31 January 2014. Of course in future years when it will be based on a full year’s CB receipts, the charge will be much greater.
Avoiding the charge
If the larger individual income is over £60,000, it may be advisable to ask the person currently receiving CB to opt not to continue to do so, since the CB will all be clawed back anyway, albeit from someone else. This could avoid the person with the higher income engaging with the self assessment system unnecessarily. Note however, that this claim to opt out can only be made by the person who is paid CB. The current online form does not make this very clear.
The claim can be made online or by post and should be made before 7 January 2013 if it is to take effect from the outset of the new regime. HMRC has said that all claims will be acknowledged, although as the process is not automated, end to end, we recommend checking that the payments do actually stop in January.
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