Around 6,000 parents have had their penalties cancelled for failure to notify HMRC that they were liable for the high income child benefit charge (HICBC). This is unlikely to be repeated, so families need to be aware of their position.
Around 1.4 million families lose some or all of their child benefit because one of the parents earns over £50,000 a year. As soon as one partner earns over £50,000, child benefit is gradually withdrawn via a tax charge. The whole benefit is lost once earnings exceed £60,000.
One of the main criticisms of the HICBC has been around its practical implementation, with many more taxpayers drawn into self-assessment who had previously been taxed through PAYE. By tying the charge to the higher earner in a family, who is generally not the person claiming the original child benefit, HMRC is also applying the charge to the family income through an individual. The onus is on the individual higher earner to notify HMRC when they tip over the threshold.
Since the 2013/14 tax year – when the charge was introduced – 35,000 families have received failure to notify penalties for liabilities through 2015/16. Following a number of challenges, HMRC instigated a review of all the failure to notify penalties issued. Where they found a ‘reasonable excuse’ for a failed notification under certain criteria, penalties would be cancelled or refunded. In the end, of the 6,000 cancellations, 4,885 received refunds.
How it works
The £50,000 HICBC threshold applies to each individual. The benefit is paid in full, for example, if both parents earn £45,000 (creating a joint income of £90,000). But as soon as one parent earns over £50,000 – even if the other does not work – they’ll be hit by this charge. Parents can opt out of receiving child benefit, but they should still register to receive National Insurance credits if one partner is not working.
The tax charge can be reduced by increasing pension contributions to reduce taxable pay to below the relevant threshold in some cases. Remember though, money in a pension cannot be accessed until at least age 55.
HMRC has said that for tax years from 2016/17, they expect the higher earner in a couple to notify them where their income exceeds the HICBC threshold, on the assumption that any parent claiming child benefit since the charge was introduced will now be aware of it.
If you have any questions about your family’s tax position, get in touch.