A decade after its introduction, the High Income Child Benefit Charge (HICBC) continues to catch out many taxpayers. Andrew McCready examines the key aspects of this controversial tax charge.
It has been 10 years since George Osborne brought in the HICBC, one of the most idiosyncratic and cumbersome additions to the UK tax system. Created as a cash cow to reduce the budget deficit following the 2008 financial crisis, it was designed to target people on higher incomes who were receiving Child Benefit payments.
The HICBC applies to individuals or their partners who earn more than £50,000. When it was introduced in 2013, the 40% higher tax rate applied to those who earned more than £42,475. Now the 40% rate applies to those earning over £50,270. This means a basic-rate taxpayer may be impacted by the charge.
Even though it has been around for 10 years, the HICBC continues to be misunderstood by some taxpayers. We clarify how it’s calculated, who may be liable for it, and how that liability may be minimised.
How is the HICBC calculated?
The HICBC is assessable on the person receiving the Child Benefit or their partner if they earn an adjusted net income of more than £50,000. It is the partner with the higher income that will suffer the charge.
Adjusted net income for the tax year is calculated based on your total taxable income for that period, less donations made under Gift Aid and qualifying pension contributions, but before deduction of any tax allowances. Don’t forget to include in your calculation the taxable value of Benefits-in-Kind, such as private medical insurance or a company car.
The tax charge is calculated based on income at an individual level rather than for the household. This means that a household may have two earners who receive an income of £49,999 each (£99,998 total) and are never liable to the HICBC. But a household with a sole earner receiving at least £50,000 may be liable.
The HICBC effectively withdraws the amount of Child Benefit received at a rate of 1% for every £100 earned by the higher earning partner above £50,000 a year. Therefore, if the individual has adjusted net income over £60,000, they will suffer an HICBC representing 100% of Child Benefit payments received in the tax year.
In some circumstances, the charge can create an effective tax rate of up to 96% on income between £50,000 and £60,000 (source: Inconsistent Incentives: Resolution Foundation, 2022).
The HICBC is worked out as follows:
A – B % x Child Benefit received C
Where A is adjusted net income for the tax year, B is £50,000, and C is £100.
The HICBC is assessed through Self Assessment. This means those impacted by the charge must file a tax return to HMRC. If you are liable to the HICBC, and don’t usually file a tax return, you should register for Self Assessment by 5 October following the tax year for which you need to pay the charge. For example, if you are liable to the HICBC in the 2022/23 tax year, you must register by 5 October 2023.
Here is an example:
Sarah has two children and received Child Benefit of £1,885.00 for the 2022/23 tax year. Her adjusted net income for the tax year was £55,000, and her partner’s was £51,000.
As the higher earning partner, with income of more than £50,000 and in receipt of Child Benefit, Sarah is liable to the HICBC.
The calculation for Sarah is (£55,000 – £50,000) / 100 = 50%; 50% x £1,885.00 = £942.50.
She will need to complete a Self Assessment tax return for 2022/23 and report the Child Benefit payments she received. She must pay the HICBC of £942.50 to HMRC by 31 January following the end of the tax year.
Who is a ‘partner’ for HICBC purposes?
A ‘partner’ is defined as someone who is married to, or in a civil partnership with, the individual receiving the Child Benefit. The couple should not be permanently separated or separated under a court order.
If you are not married or in a civil partnership, you may be considered a partner if you are living with someone as if you were a spouse (or civil partner), and they are in receipt of Child Benefit. There is no legal definition of what constitutes a partner in these circumstances. But several factors should be considered, including:
the stability of your relationship
your financial interdependence
whether you have children together
your future intentions as a couple, and
whether or not your relationship is publicly acknowledged.
To complicate things further, you must assess your liability to the HICBC weekly. That means deciding at what point you began living together as if you were spouses or civil partners.
How can the HICBC be minimised?
If you receive Child Benefit, you may elect to stop the payments. But even without those payments, you can continue to receive the corresponding credits for National Insurance purposes. These in turn go towards your entitlement to the State Pension and other benefits.
If you or your partner are impacted by the HICBC, another option is to ‘shift’ the income of the higher earning partner to the other partner. Shifting income can be achieved through the transfer of assets, for example, by changing the beneficial ownership of a property generating rental income. This would be advantageous if one partner has income of between £50,000 and £60,000 per year and the other has income below £50,000. The income tax saved by income shifting will vary from person to person.
You should always seek professional advice before transferring assets between partners, as there may be additional tax and anti-avoidance implications to consider.
There are additional measures you may wish to take to reduce your, or your partner’s, liability to the HICBC. Your personal circumstances will determine whether you can benefit from these or not.
HMRC has been increasingly targeting taxpayers who it believes are affected by the HICBC. If you think you or your partner are impacted by the charge, you should review your position as soon as possible.
The information in this article should only be taken as guidance, so you should always ask for professional advice. For more information about the issues raised, please contact Andrew McCready.