State pension contributions affected by child benefit changes

HMRC has published a guidance note explaining who is affected by the High Income Child Benefit Charge (HICB), how it works and how HMRC administers the new charge, reports chartered accountants Northampton Harris & Co.

From 7 January 2013, taxpayers earning more than £50,000 in a tax year who receive Child Benefit, or live or lived with a partner receiving Child Benefit are now liable to pay an income tax charge on that benefit. The charge payable depends on their ‘adjusted net income’ (ie, the total taxable income less certain tax reliefs, including pension contributions), and amount of Child Benefit the claimant is entitled to.

Child Benefit has been withdrawn for taxpayers earning over £60,000 per annum.

For those with income between £50,000 and £60,000, the tax charge will be less than the child benefit entitlement. They will pay 1% of the child benefit entitlement for every £100 of their income above £50,000. For those with income of over £60,000, the charge will effectively reduce the child benefit to £nil. The changes are expected to affect 1.2m families, 70% of which will lose the benefit in full.

However, anyone considering opting out should be aware of the impact on state pension rights.

Non-working individuals who receive child benefit for a child under 12 are entitled to receive national insurance (NICs) credits which build entitlement to the state pension. Where a decision is taken not to receive child benefit payments as a result of the introduction of the new charge, it is important that a child benefit claim form is still completed. The entitlement, rather than the payment, of child benefit will ensure that NI credits continue.

Those who received Child Benefit between 7 January and 5 April 2013 are advised to register for Self Assessment by 5 October to avoid paying penalties of up to 100% of the tax charge in relation to the HICB for 2012-13.