IT contractors and the Higher Income Child Benefit tax charge

Since 7th January 2013, rather than remaining a benefit paid to all regardless of wealth, families, where one parent earns £50,000 or more per year, are not entitled to receive the full level of child support.

What are the new rules?

One of the more controversial announcements made during Budget 2012 was the radical overhaul of the  Child Benefit rules, which are no longer universal, for the first time since 1946.

Currently (during the 2020/21 tax year), the Government pays £21.05 per week to a parent for their eldest child and an additional £13.95 each for any other children.

However, since the Higher Income Child Benefit rules came into force in 2013, the benefit (worth nearly £1,800 per year if you have two children) is reduced on a sliding scale if one parent earns between £50,000 and £60,000.

The tax charge amounts to 1% of the Benefit received for every £100 one partner earns over £50,000

So, if one parent earns £60,000 or more, then the entire benefit is removed.

It is  one million families are affected – and many IT contractors who have children are likely to have been affected since 2013 onwards.

Controversial change

The change has been criticised by many, due to a number of anomalies in the way it has been drawn up.

If a family has two parents earning £49,000 per year each (£98,000 in total), they will not be affected at all. However, if a family has one earner bringing in £60,000 per year, they lose their entitlement entirely.

Another unfortunate result of this change is that hundreds of thousands of taxpayers now have to register for self-assessment in order to repay any Child Benefits they are no longer entitled to receive.

The rules also appear to be rather complicated, particularly if a child’s parents have split up. For example, which parent will actually claim the benefit, and will one parent always know what the other one is earning?

What you should do if you are affected

If you are affected by the change, then you have two choices:

1. Voluntarily de-register for Child Benefit.
2. Pay any additional tax you owe for the previous tax year via the Self Assessment process.

The partner with the highest income is responsible for re-paying any Child Benefit received. If both partners earn over £50,000, then the one with the highest income above the threshold should account for the charge.

If you’re a limited company contractor, you already calculate your personal tax liabilities via Self-Assessment, so you need to declare the total amount of Child Benefit you received during each tax year. Your tax bill will be adjusted according to the level of income you receive.

However, if you’re contracting via an umbrella company, and don’t usually fill in a Self Assessment form, you should register here.

You can deduct a number of things from your gross income (such as pension contributions) before working out the amount of income you receive (for Child Benefit purposes).

Further Information

Find out if you are liable to pay the High Income Child Benefit Tax Charge at self-assessment time by using this Government tax calculator, alongside some easy-to-digest guides to the Child Benefit tax rules.

For more information on registering for self-assessment, visit this HMRC page.

There are a number of ways to mitigate against losing your Child Benefit entitlement (for example, splitting company income with your spouse, or investing more in a pension), so make sure you discuss your tax situation with your accountant.