Sarah Saunders, manager, private client services at RSM argues that the government needs to assess the threshold for the high-income child benefit charge (HICBC)
The intention of the HICBC had logic to it, to prevent high earners from obtaining state benefits to help pay for their children. The way it is collected has however always been problematic. Now, as RSM and the Low-Income Tax Reform Group (LITRG) have pointed out, the increase in rate bands over the years means that the charge will be clawed back from some basic rate taxpayers.
The charge is collected through self-assessment from the highest earning of the claimant and their partner, where at least one partner has more than £50,000 of income. Next year the personal allowance plus basic rate band will total £50,270. If the charge is to continue in its current form the threshold should be increased.
However, the charge also suffers from other defects.
Some taxpayers have only been brought into self-assessment to deal with this charge. In addition, people whose circumstances have changed since the charge was introduced are often unaware of it and the requirement to pay it.
Lack of awareness for unmarried people
The charge is not limited to married couples: cohabitees and estranged couples may also be caught. Again, this may lead to couples assuming they are not affected as they are not married. They may also be unaware of the income position of an estranged partner, or of their claim to Child Benefit.
The charge is not fair. It applies if one chargeable person earns more than £50,000. This sounds reasonable until you imagine two identical couples. In one family both partners have income of £49,999, so neither is liable despite a family income of £99,998. Next door one partner has £60,000 income and the other none. The lower income family will suffer the charge.
High marginal rates of tax
The charge claws back £1 of child benefit for every £100 of income received over £50,000. Therefore, with income of £51,000, 10 per cent of benefit received will be clawed back. In 2020/21 for a person with two children the benefit would be £1,855, so £185 will be clawed back at this income level.
This means that the ‘excess’ £1,000 of income will suffer both normal 40% tax of £400 and the £185 clawback. That’s a total of £585 on income of £1,000 – equivalent to a 58% marginal tax rate. More children would increase the claw back and marginal tax rate.
Some taxpayers have chosen not to claim the benefit. However, this can cause problems for future pension entitlements. To maintain rights without getting caught up in self-assessment it is necessary to establish the claim but ask not to be paid the benefit.
Overall, this is a very complex way of doing something which should be simple, and it enmeshes many people in the self-assessment tax net. There must be a better way.
About the author
Sarah Saunders is a manager, private client services at RSM