Few measures in the Budget 2012 caused such controversy as the  high income child benefit charge (“HICBC”).

Unusually there was no consultation on the legislation and as a result the draft legislation will be difficult to administer.

The rules:

A person (“P”) is liable to the charge if their net income for the tax year exceeds £50,000 and:

  1. P is entitled to child benefit for one week (or more) in the year; or
  2. The partner of P, lets call him or her Q, is entitled to child benefit for one week (or more) and P’s net income is higher than Q’s income.

How much is the charge?

The charge is calculated 5 steps:

  1. add up or calculate your child benefit;
  2. calculate your income and deduct contributions to pension schemes and donations to charity (this is net income);
  3. deduct £50,000 from your net income calculated in step 2;
  4. Divide the answer to step 3 by 100; and finally
  5. multiple the figure from step 2 by the figure from step 4.  This is the charge.

An example:

Jill has three children, she receives £20.30 a week for the eldest and £13.40 for the other two.  Jill’s husband, Jack earns £56,000 after deducting donations to charity and pension contributions.

The new charge comes into force on 7 January 2013 so there will be 13 weeks of the new charge in the current tax year.

Jill’s total child benefit is £612.30 (£47.10 for 13 weeks) rounded down for this calculation to £612.  (step 1)

The percentage charge is £(56,000-50,000)/100 = 60% (step 2, 3 and 4)

Jack will be liable to a charge of 60% x £612 = £367 (after rounding) (step 5)

P and Q are partners if they are married or civil partners and are neither separated under a court order nor in circumstances where the split is likely to be permanent OR

P and Q are not married nor civil partners of each other but are living together as husband and wife or civil partners.

What can contractors, freelancers and small businesses owners do now?

  • Think about splitting your income so that you and your partner both stay below the £50,000 threshold.
  • Consider making pension contributions to bring your net income below the threshold and remember you can make small pension contributions for other members of the family (see our blog post on year end planning).
  • Make sure the partner with the highest earnings makes the charitable donations.
  • Put some money aside for the payment if you don’t want it included in your PAYE code for the following year.
  • Take advantage of childcare vouchers (see our blog post)

How is this to be administered?

We have had independent taxation for some 20 years and many couples are not aware of each others earnings.  How do you know who is the highest earner?  Will HMRC divulge personal information relating to another tax payer?  Sole traders with year ends at the end of the tax year will not know their income until their books and records are compiled by their accountant and so meeting the notification of charge deadline of October 2013 may be difficult.

This is a new area of legislation and Clearways Accountants will look at the subject again when more information is available.