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Dealing With The Effect Of The Child Benefit Tax

by on November 30, 2012

in News

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In January, HM Revenue & Customs will begin reducing child benefit payments for residents earning at least £50,000. More than one million families will be taxed if they continue to claim this benefit next year. The changes could cost nearly £2,500 a year for a family with three children and many families do not have time to prepare for this additional expense.

The change could push approximately a half-million parents into the self-assessment tax system and some stay-at-home-parents will lose entitlements to state pension.

The universal child benefit is currently £20.30 weekly for the first child and £13.20 weekly for each additional child. Effective January 7, any family containing an individual who earns more than £50,000 will experience a reduction in payment based on earnings in excess of this level. The benefit will be eliminated for anyone earning more than £60,000. The tax office letter explains that these two groups can give up the benefit or take it and have it recouped when they complete their tax forms.

What makes this situation especially unfair is that a mother will lose her child benefit if the father earns more than £50,000. In essence, she is losing money due to income that she never received if she is a single mother. Only income of the highest earner is taken into account when determining child benefit entitlement.

Therefore, households in which each parent earns £50,000 will not experience any changes, while those in which one parent earns £61,000 and the other earns nothing will lose their child benefit. The change will save the government billions of pounds annually. However, accountants report that it may cause as many problems as the Labour child tax credit system.

Individuals on the Pay As You Earn (PAYE) system who earn more than £50,000 are now receiving their notices. However, business partners and the self-employed have not received any notification. Many have fluctuating incomes that could leave them out of pocket if they do not elect the benefit but do not end up exceeding the income threshold.

Tax professionals recommend that if people are unsure of what their income will be, they should claim the benefit and if necessary, claw it back later via the self-assessment system or PAYE.

As household expenses rise, many affected families are turning to financial advisers for help. Those who elect not to receive the benefit should continue to receive National Insurance credits. For anyone who is not working, these count toward the state pension entitlement. Therefore, the individual will claim the benefit without receiving the money. However, a new mother who is disqualified due to earnings of the father will not receive National Insurance credits, which could lead to financial problems.

Blended families will face the most issues with the child benefit changes. If a mother continues to claim the benefit after moving in with a new partner, that man could wind up paying a tax charge while the father does not. Parents who find themselves possibly subject to a reduction or elimination of their child benefit should obtain financial advice now.


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