Avoiding the Threshold: Child Benefit Reform

Avoiding the Threshold: Child Benefit Reform

In January 2013 the concept of child benefit being paid to everyone will end. Osborne admitted in his budget statement last month that the previous model, to withdraw CB from any household with a higher-rate taxpayer, had been unfair: "We want to avoid a cliff edge where someone who earns just £1 over the threshold will lose all of their benefit," the chancellor said. So what is the government proposing now?

• CB payments will be tapered once one parent earns £50,000;
• Tapering will be at a rate of 1% for every £100 over £50,000;
• Parents earning over £60,000 will no longer be entitled to CB;
• CB will be taken back as an income tax charge on the higher earner;
• Reforms will kick-in in January 2013;
• 90% of families, around 750,000 households, will still receive all or some of their CB.

Currently

CB is a universal benefit paid to all households with children at a rate of £20.30 per week, or £1,055.60 a year for the oldest child, and £13.40 a week, or £696.80 a year, for each younger sibling. Usually CB will end when the child turns 16, completes his or her A-levels, or leaves full-time education or training.

In the future

CB won’t be a universal benefit. It will still be paid to first-born children and their siblings up to the age limits described above, but will now be dependent on household income: a family with one parent earning £25,000 and one earning £45,000 will still receive the full benefit, while a family with one parent earning £25,000 and a second earning £55,000 will receive £527.80 a year for their first child and £348.40 for each younger child.

Problem solved?

The change does mitigate the "cliff edge" to an extent, but there is still a problem: a couple both earning £49,000 a year will still be entitled to the full benefit but a family with a single earner taking home more than £60,000 will get zero. This tax charge is to apply from 1 January 2013, and will be collected through PAYE and self-assessment from the higher earning partner in the family.

What should you do?

If you or your partner are currently in receipt of child benefit you don’t have to do anything now; HMRC will be writing to all those affected by this change later in 2012. It is important, however, that you contact DNS to discuss how we could re-arrange the distribution of income within your family to reduce the affect of the withdrawal of child benefit if you expect to earn more than £60K as personal income. Please do this as soon as possible to ensure that the new arrangements are in place for the full tax year 2012/13.

Best wishes,

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.