| Mr and Mrs A have 3 children under the age of 16. Mrs A claims the child benefit and receives £25.60 per week for the eldest child and £16.95 each for the second and third child. Mrs A does not work. |
| Mr A earns £59,000 and has also received a bonus of £10,000. |
| Total adjusted net income = £69,000 |
| Total child benefit claimed = £3,094 |
| Tax charge for child benefit = £69,000 - £60,000 = £9,000/200 = 45 |
45 x 1% = 45% of £3,094 = £1,392.30 |
| Mrs A will still receive the child benefit of £3,094. However, Mr A will suffer the tax charge of £1,392 (the charge rounded down to the nearest whole pound). |
Therefore the effective rate of taxation between £60,000 and £69,000 is 55.47% (£9,000 taxed at 40% totals £3,600, add on the £1,392 HICBC means that the tax is effectively £4,992 (which is 55.47% of £9,000)). |
Pensions
Reduce the impact of the high income child benefit tax charge
Last Updated: 6 Apr 24 7 min read
The high income child benefit tax charge (HICBC) impacts those who have adjusted net income over a certain minimum, and are (or their partner is) receiving child benefit.
The high income child benefit tax charge (HICBC) impacts those who have adjusted net income over a certain minimum, and are (or their partner is) receiving child benefit.
From it's inception until 5 April 2024 the minimum adjusted income this could apply to was £50,000. From 6 April 2024, this is now £60,000.
Reducing adjusted net income can reduce the impact or negate it entirely.
Key Points
- The high income child benefit tax charge applies where there is one partner with adjusted net income of over £60,000 in a household where child benefit is claimed.
- Child benefit is still a universal benefit, but the tax charge removes or partially removes the benefit.
- Reducing adjusted net income can mean that the high income child benefit tax charge does not apply.
The facts
Child Benefit remains a universal benefit.
However, if someone:
- has adjusted net income of more than £60,000, and
- lives with a partner, in a household where Child Benefit is claimed or claims themselves, and
- is the partner with the highest adjusted net income, then they will incur a tax charge which removes or partially removes the benefit of receiving Child Benefit.
Adjusted net income is the measure currently used to work out entitlement to personal allowances. Adjusted net income is, broadly, taxable income (it should be noted that this includes all rental income, FULL amount of bond gains and any other taxable income). Certain deductions are allowed, such as the gross value of personal (relief at source) pension contributions, gift aid and trading losses.
From 6 April 2024 those with adjusted net income between £60,000 and £80,000 then the charge will be 1% of the total benefit for every £200 of income over £60,000. The charge applies to the partner with the highest adjusted net income regardless of who actually receives Child Benefit.
From 7 January 2013 until 5 April 2024 those with adjusted net income between £50,000 and £60,000 were charged 1% of the total benefit for every £100 of income over £50,000.
If a taxpayer or their partner has adjusted net income above the minimum and receives Child Benefit, then they will be affected. It’s the partner with the highest adjusted net income that would be liable to the charge, even if they are not the recipient of the child benefit.
The amount of the charge will be collected through self-assessment or PAYE.
The recipient of Child Benefit may decide not to receive payments which would mean that they or their partner will not be liable to the tax charge. However, claims should be completed for new children born so that entitlement to National Insurance credits are not lost.
The definition of partner includes those married, in civil partnerships or couples living together as if married or civil partners.
Planning strategy
- Identify adjusted net income.
- Subtract £60,000 from adjusted net income.
- The difference is the income giving rise to the tax charge.
- Either:
a. Reshape the tax causing income, or
b. make a pension contribution in the tax year in which the child benefit tax charge will apply.
Case study 1: earnings (UK tax rates)
How can this charge be mitigated?
If Mr A makes a net relief at source pension contribution of £7,200 then this would be grossed up to £9,000. This £9,000 is deducted from the taxable income leaving an adjusted net income of £60,000. This would mean that there is no tax charge to pay. He would then be able to claim another £1,800 back as higher rate relief applies. Therefore, the pension contribution would actually cost £5,600.
The total HICBC saving is £1,392 plus £1,800 of a reduction in the income tax bill, plus £1,800 applied to the relief at source pension contribution. = £4,992.
So, the effective rate of tax relief is 55.47%, this is the £4,992 total tax saving divided by the £9,000 gross pension contribution.
Case study 2: Earnings and dividend (UK rates)
| Mr and Mrs C have 2 children under the age of 16. Mrs C claims the child benefit and receives £25.60 per week for the eldest child and £16.95 per week for the second. Mrs C earns £60,000 from her job and has recently inherited a share portfolio of £100,000 which usually generates dividend income of £5,000 per year. |
| Mr C also earns £60,000 per year from his job. |
| Mrs C’s total adjusted net income = £65,000 (£60,000 + £5,000) |
| Total child benefit claimed = £2,212.60. |
| Tax charge for child benefit = £65,000 - £60,000 = £5,000/200 = 25 |
25 x 1% - 75% of £2,212.60 = £553.15 |
| Mrs C will still receive the child benefit of £2,212.60. However, she will suffer a tax charge of £553. |
| Therefore the effective rate of taxation between £60,000 and £65,000 is 41.42% (£500 taxed at dividend zero rate, and £4,500 taxed at 33.75% (Dividend Higher Rate of Taxation) is £1,518, add on the £553 HICBC means that the tax is effectively £2,071 which is 41.42% of £5,000). |
This may seem beneficial in comparison to the first case study, but without the HICBC the income tax would have been an effective 30.36%, (£500 taxed at dividend zero rate, and £4,500 taxed at 33.75% (Dividend Higher Rate of Taxation) is £1,158, which is 30.36% of £5,000. |
How can this charge be mitigated?
Reshaping income
Mrs C could; "Bed and ISA" and 'Bed and Bond'.
Income from an ISA is not included for adjusted net income purposes.
A bond is non-income producing. It is only chargeable gains that will impact adjusted net income. Therefore if she keeps regular withdrawals across segments within the 5% tax deferred allowance the withdrawals won’t impact her adjusted net income.
This means if she replaced her shares with an ISA and/or bond she could reduce her adjusted net income to £60,000.
She would then receive her child benefit without the tax charge of £553.
Personal Pension Contribution
If Mrs C makes a net pension contribution of £4,000 then this would be grossed up to £5,000.
This £5,000 is deducted from the taxable income leaving an adjusted net income of £60,000. This would mean that there is no tax charge to pay.
She will then be able to reclaim higher rate tax relief and retain the £553 child benefit.
The reduction in child benefit tax charge means effective rate of tax relief by making this pension contribution would be boosted to 51.06%, tax saving of £1,000, plus £553 of HICBC saved, plus £1,000 relief at source = £2,553 (£2,553 / £5,000 = 51.06%).
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