Child Benefit Tax Charge

Since 7 January 2013 an income tax charge applies to those who get Child Benefit and whose income (or partner’s income) is more than £50,000 in a tax year. If income is between £50,000 and £60,000, the charge is a proportion of the Child Benefit received. If it’s over £60,000, the amount of the charge is the same as the Child Benefit received. We explain below how to reduce or eliminate the charge.

Key facts

  • Child benefit for 2017/18:
    • Higher Rate (for the eldest child) £20.70 p.w.
    • Lower Rate (for each additional child) £13.70 p.w.
  • Qualifying children are those:
    • aged under 16, or
    • aged under 20 and in full-time, non-advanced education or on certain approved vocational training courses.

Child Benefit is not means tested – it’s paid tax free to most people with children with no requirement to have paid national insurance contributions at all, never mind at a minimum level.

It’s important to note that Child Benefit itself is not being taxed or reduced – it will continue to be paid in full to the claimant – usually the mother.  However a tax charge will be levied via the tax return on any partner whose income exceeds £50,000 p.a. If both partners have incomes over the limit, the charge will apply to the partner with the higher income. The amount of the tax charge will be one per cent of the amount of Child Benefit received for every £100 of excess income, which is why the charge equals the Child Benefit received in cases where the income is over £60,000 p.a.

What can be done?

The ‘income’ used by HM Revenue & Customs to calculate the charge is ‘adjusted net income‘.

The starting point for this calculation is net income on which income tax is calculated. This includes employment income, income from self-employment, pensions and investment income less any trading losses and payments made gross to occupational pension schemes.

The next step is to deduct the grossed up amount of any Gift Aid contributions and the grossed up amount of any pension contributions that receive tax relief at source.

The final step is to add back in any tax relief for payments to trade unions or police organisations deducted when arriving at net income. The result is the adjusted net income.

So any pension contributions made by an individual, whether gross contributions to an occupational pension scheme or grossed up contributions to a personal pension will reduce the final amount of adjusted net income. If this is enough to get it below £50,000, the charge will be avoided; if it ends up between £50,000 and £60,000, the charge will be reduced.

Case study

Tony has a taxable income of £58,000 and his wife Lucy has no income. They have two children which results in Lucy receiving Child Benefit of £1,788.80 p.a.

Since Tony’s income is £8,000 over the limit, he’ll face a tax charge of 80% of £1,788.80 = £1,431.04.

As a couple, the overall value of the Child Benefit has therefore been reduced to £357.76 (£1,788.80 – £1,431.04).

If he pays net contributions totalling £6,400 in the tax year to a personal pension plan, this will be grossed up to £8,000. This means that his adjusted net income falls to £50,000 and no charge is payable.

By paying the £6,400, he’s saved £1,431.04. Assuming all of the pension contribution lies in the higher rate tax band, he’ll also be able to claim an additional £1,600 in tax relief (20% of £8,000) through his tax return.  So his £8,000 pension contribution has in fact cost him £3,368.96 (£6,400 – £1,431.04 – £1,600).