Changes to the rules on child benefit come into force today which will mean tens of thousands of ordinary families seeing a reduction in their incomes.
From 7th January 2013, families with one parent earning more than £50,000 a year will no longer be able to claim the total amount of child benefit – and if one parent earns £60,000 or more they will lose their benefit completely.
Child benefit is a tax-free payment from HMRC to help parents cope with the cost of bringing up children. At the moment, one parent can claim £20.30 a week for an eldest or only child and £13.40 a week for each of their other children. The payments apply to all children under 16 and in some cases until they are 20 years old.
How does this affect different types of families?
The amount received will be withdrawn gradually as one parent's income rises above £50,000, with the child benefit being eroded completely once someone's income is £60,000 or more.
Therefore, two families, each with two children and living as next door neighbours, could be treated very differently. In the first family, dad earns £60,000 per year. His family will lose all of their child benefit, or £1,752.40 per annum. Next door, both parents work and each earns £30,000. Despite their household income matching their neighbours, they will keep all of the child benefit.
Throughout the UK, it is expected that more than a million families will see their entitlement reduced. The way in which the new system will operate has still to be finalised and there are fears of a repeat of the tax credits chaos.
What can you do if your income takes you over the limit?
Be proactive and aware. Don’t wait until HMRC contact you, begin planning now.
If you are a parent and one of you earns more than £60,000, you can choose to stop claiming child benefit and save the tax authority the trouble of getting it back. If you keep claiming it, then you will have to declare this through self-assessment and HMRC will then tax, the high earner by the equivalent amount of child benefit which you, or your partner, claim.
For families where one parent earns between £50,000 and £60,000, benefit is tapered down dependent on earnings. If you are in this group, it is worth taking advice to look at ways of minimising the impact, for example:
- make additional payments into a pension scheme. This will reduce your income by the gross amount (for every £1,000 paid in the gross amount will be £1,250). You will also receive higher rate tax relief on these payments;
- purchase childcare vouchers if your employer offers these and your children are of nursery age. The cost comes off your gross salary.
The bottom line is – get appropriate advice and plan accordingly before January arrives.