The High Income Child Benefit Charge (HICBC) is a tax that affects higher earners who receive Child Benefit in the UK. Introduced in January 2013, it aims to claw back some or all of the Child Benefit from households where one partner’s income exceeds £50,000 per year. While this charge can seem like a penalty, understanding how it works and how to plan around it can help you use it to your advantage and potentially reduce the impact on your finances. This detailed guide explains what the HICBC is, how it’s calculated, and strategies to minimise or offset it.
What is the High Income Child Benefit Charge?
The HICBC is a tax charge on higher earners who receive Child Benefit. If you or your partner’s individual income exceeds £50,000, you may be liable to pay some or all of the Child Benefit back to HMRC through the charge. The key points are:
- The charge applies to the individual with the higher income, not necessarily the Child Benefit claimant.
- It begins at £50,000 and increases gradually until income reaches £60,000, at which point the entire Child Benefit is effectively reclaimed through the charge.
- The charge is paid through the Self Assessment system, so the higher earner must register for Self Assessment if they’re liable to pay it.
How the Charge is Calculated
The HICBC is calculated as 1% of the Child Benefit received for every £100 of income over £50,000. For example:
- If your income is £51,000, you’ll pay 10% of the Child Benefit received as the charge.
- At £55,000, you’ll pay 50% of the Child Benefit as the charge.
- At £60,000 or above, you’ll pay 100% of the Child Benefit as the charge, effectively nullifying the benefit.
This means the higher your income above £50,000, the more of the Child Benefit you pay back to HMRC.
How to Check if You’re Affected
To determine if you’re affected by the HICBC, calculate your ‘adjusted net income,’ which includes all taxable income minus certain deductions such as pension contributions and Gift Aid donations. This figure determines whether you’re liable for the charge.
Adjusted net income is not always the same as your salary, so it’s important to consider all sources of income and allowable deductions.
Strategies to Reduce the Charge
1. Make Pension Contributions
Contributing to a pension scheme reduces your adjusted net income, potentially bringing it below the £50,000 threshold or reducing the charge. For example, if your salary is £55,000 and you contribute £5,000 to a pension, your adjusted net income drops to £50,000, eliminating the charge altogether. This strategy not only saves tax but also boosts your retirement savings.
2. Use Gift Aid Donations
Donations to charity under Gift Aid also reduce your adjusted net income. If you’re close to the threshold, consider making charitable donations to lower your income and reduce or eliminate the charge.
3. Split Income Between Partners
If you and your partner both work, consider how income is split. The charge applies only if one partner’s income exceeds £50,000, so balancing income between partners can help avoid the charge. This might involve transferring assets or adjusting working hours to spread income more evenly.
4. Sacrifice Salary for Benefits
Some employers offer salary sacrifice schemes for benefits like pensions, childcare vouchers, or cycle-to-work schemes. By reducing your gross income through salary sacrifice, you can bring your adjusted net income below the threshold.
Should You Opt Out of Child Benefit?
If you know you’ll have to pay the entire Child Benefit back, you might consider opting out of receiving payments to avoid having to pay the charge later. However, registering for Child Benefit is still important because:
- It ensures your child is issued a National Insurance number automatically at age 16.
- It entitles the claimant (usually the lower earner) to National Insurance credits towards their State Pension if they are not working or earning below the NIC threshold.
If you opt out, you’ll still need to register for Child Benefit but can choose not to receive payments.
Paying the HICBC
The HICBC is collected via the Self Assessment system. If your adjusted net income is over £50,000 and you or your partner receives Child Benefit, you must register for Self Assessment, complete the tax return, and pay any tax due by 31 January following the end of the tax year. HMRC may adjust your tax code to collect the charge via PAYE in future years.
Practical Example
Let’s say Tom has an adjusted net income of £57,000, and his partner claims Child Benefit for two children (around £2,212 per year). Tom’s income is £7,000 over the threshold, so he pays 70% of the Child Benefit received (£2,212 x 70% = £1,548.40) as the HICBC. Tom decides to contribute an additional £7,000 into his pension, reducing his adjusted net income to £50,000, eliminating the charge and boosting his retirement savings.
Record-Keeping and Compliance
Keep records of your income, pension contributions, Gift Aid donations, and Child Benefit received. This will help you calculate your adjusted net income accurately and ensure you complete your tax return correctly. HMRC can charge penalties and interest for underpayment, so accurate reporting is essential.
When to Seek Professional Advice
The HICBC can be complex, especially if you have variable income, multiple income sources, or are close to the threshold. A tax adviser or accountant can help you plan your finances, manage pension contributions, and optimise your tax position effectively.
Conclusion
The High Income Child Benefit Charge can be a frustrating addition to your tax bill, but with careful planning, you can use it to your advantage. By reducing your adjusted net income through pension contributions, Gift Aid donations, or salary sacrifice, you can reduce or even eliminate the charge, all while boosting your savings and supporting good causes. Stay informed, review your income annually, and seek professional advice if needed to make the most of the available tax reliefs and keep your finances healthy.
