The High Income Child Benefit Charge: Budget Changes Bring Relief to Higher Earners with Children
Published 11th April 2024
The recent budget announcement brought good news for higher-earning families with children. The chancellor revealed plans to overhaul the controversial High Income Child Benefit Charge (HICBC).
This tax penalty has been affecting many parents. Still, the proposed changes are set to improve the financial situation of nearly half a million families by an average of £1,260 a year.
In comparison, 170,000 families will no longer be subject to the charge.
Understanding the HICBC
The HICBC was introduced in 2013 to reduce the child benefit paid to higher-earning parents. For those earning more than £50,000 a year, child benefit is clawed back through the tax system on a sliding scale.
The charge is 1% of the child benefit amount for each £100 of income between £50,000 and £60,000. For those earning over £60,000, the charge is 100%, meaning they have to repay all the child benefits they've claimed.
The Impact on Families
The HICBC has been dubbed a "tax on children" by some, leading to parents facing effective marginal tax rates much higher than the official 40% higher-rate income tax band.
Some parents with three children have paid tax at 71% on earnings between £50,000 and £60,000. As the threshold hasn't moved with inflation, more families have been drawn into paying the charge.
The Government's Plan
Recognising the unfairness of the current system, the government has announced plans to move to a system based on household income rather than individual income by April 2026.
In the meantime, from 6 April, the threshold at which the charge kicks in will be raised to £60,000, and the rate at which the penalty is charged will be halved.
This means people will only lose all their child benefits after earning £80,000.
What It Means for You
From April 2024, someone earning £60,000 will get to keep all their child benefit, whereas currently, they would lose it all. This means a gain of £2,212 a year for someone with two children. If you have three children, the gain is £3,094.
If you've opted out of receiving child benefits to avoid the charge, now is the time to consider restarting your payments. You can complete an online form or contact the Child Benefit Office.
Looking Ahead
The government's plan to switch to a system based on household income by April 2026 is challenging. Income tax is assessed individually, so the tax system may need significant changes to accommodate this new approach.
Some experts have expressed concerns about the complexity and cost of implementing such changes.
What You Should Do Now
If you're affected by the HICBC and have yet to opt out of receiving child benefits, remember to budget for the tax bill you'll face when filling in your self-assessment form for 2023-24.
The good news is that in the future, those affected by the charge won't have to register for self-assessment to pay back what they owe, as the money will be clawed back via PAYE tax codes.
Suppose you opted out of receiving child benefits due to the charge. In that case, it's time to reassess your situation and consider restarting your payments. The recent changes could significantly boost your family's finances.
As always, if you need clarification on how these changes affect you or need help managing your finances, feel free to contact the AAT Licensed team at Hammond-Barr. We can help you navigate these changes successfully.
Want to know more?
You can contact Hammond-Barr accountants on 01438 281281 or via email at [email protected].
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