Business Finance: Peter Harrup on why Child Benefit is about to get more complicated

IN BUDGET 2012, the Chancellor announced that from April 2013 some means testing will apply to Child Benefit to cut the cost to the Exchequer.

Although the idea of a cliff-edge test was dropped, the current arrangements will still result in unfairness, administrative complexities and even domestic disharmony.

The new system is to be administered by HM Revenue & Customs but Child Benefit will remain separate from the Child and Working Tax Credits that HMRC already administers. So, for families where an Income Tax return is needed, this will mean sending in three separate forms to HMRC every year showing mostly the same information!

In October, HMRC will begin writing to Child Benefit claimants warning them that the benefit will be clawed back through the claimant’s tax code or tax assessment where annual income exceeds �50,000 and asking if they wish to opt out of receiving it from April 2013. The claw back will be 1% of the benefit for every �100 of income over �50,000, so by �60,000 all benefit is lost.

Controversially, the clawback rules apply to the claimant’s partner (spouse, civil partner or cohabitee) as well as the claimant. For example, if a woman claims Child Benefit and has annual income of �15,000 but her husband has income of �65,000, the benefit will be paid to her but clawed back from her husband via his salary (the claw back is always from the higher earner).

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However, in a similar household where both husband and wife earn �45,000 (i.e. a higher combined income) there will be no clawback because the �50,000 individual limit is not breached.

For many couples where one person will exceed the �60,000 annual earnings threshold, it may be simpler to opt out of receiving Child Benefit initially. However, where incomes are variable or fall between �50,000 and �60,000, where domestic partnerships end or new partnerships are created, there are bound to be difficulties and under- or over-payments will arise.

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For small business owners, for example, a couple owning a company, the impact of the clawback adds yet more complexity to their financial affairs and careful planning will be needed to ensure that net family income is maintained.

While no politician wants to be remembered as the person who abolished Child Benefit, the new arrangements are a poor compromise and the eventual fall-out may be that it is subsumed within the new Universal Credit.

In the meantime, families should think carefully about Child Benefit claims for 2013/14 and the consequences.

: : Peter Harrup is a partner at the Ipswich office of accountants PKF

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