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Should you give up your child benefit? And the tricks that can help you keep it

From Monday a child benefit shake up, which means those earning over £50,000 will have at least some of their payments removed, will affect more than 1.2million families.

Yet, despite a government push to explain the complicated and controversial plans, it is thought that a third of those families might still be in the dark regarding the changes.

Are you affected? And if so, what are your options? We explain.

All change: Child benefit changes will affect 1.2 million families - but what should you do?

What’s happening?

Technically no one is having child benefit payments removed, but the changes mean that some people will end up having them taken back through tax and so may no longer wish to receive them.

From 7 January the partner with the highest income will face an extra tax charge to take back child benefit, depending on how much they earn.

If their income is £60,000 or more, the tax charge will be the same as any child benefit received– effectively cancelling it out. However, this will have to be paid back via self-assessment forms rather than payment being stopped.  

Anyone earning above £50,000 (but not more than £60,000) will pay a charge of 1 per cent of the benefit for every £100 of income above the level of £50,000.

That means if your income is £56,000 your charge would be 60 per cent of the child benefit received. As an example, a household with its top earner on £56k with three children gets £2,449.20 in child benefits payments a year, so there would be a charge of £1,469.52.

  More... Taxman fails to tell 300,000 families about changes to child benefit Controversial child benefit changes will eat up more resources than chasing millionaires avoiding tax The trick to keep child benefit and boost your retirement savings

How do you work out if you are affected?

If you earn more than £50,000 a year, it is almost certain that you will be affected by the changes. The same is true if you earn less than £50,000, but have other sources of income, such as savings interest, investment dividends, or buy-to-let rent that pushes you over the benchmark.

However, you can deduct some things, the main element for most being pension contributions, from your income to deliver the figure that the taxman will use called 'net adjusted income'. We explain this below.

The charge is assessed on the partner with the highest income, rather than on overall household income. This leads to the problem where a family with one earner on £52,000 would lose some child benefit, but if both earned £50,000 then no charge is made, even though the total household income is £100,000.

First step: The changes are controversial and complicated - we try to explain them.

What will you have to do?

The charge kicks in from 7 January 2013. If this applies to you then you need to register for online self-assessment and submit your form online by 31 January 2014.

The charge will be collected through filing a self-assessment tax return but you will not need to do this until January 2014.

The Revenue estimates that 500,000 more people will have to fill in a self-assessment form as a result of the charge. If you don't fill in a self-assessment tax form on time, you will be fined.

When do I have to decide on whether to give up child benefit by? What happens if I want to give it up after this date?

You can avoid the charge and hassle of self-assessment by getting the person who currently receives the benefit (this may be different to the person receiving the charge), to tell HMRC they do not want to receive it. They have until midnight on Sunday to do this online.

If you miss this deadline then you will be liable to a tax charge - and thus have to complete a self-assessment form. This will be calculated from the 7 January until the date that HMRC is notified.

Entitlement to the benefit does not stop if you do not receive it. So if your circumstances change and your income falls, you can get it reinstated. 

You can opt out by calling HMRC on 0845 302 1444 or www.hmrc.gov.uk/stopchbpayments.

For the future: If you're affected by the changes then it's up to your family to decide what to do. It might still be worth receiving the benefit.

This starts in January, why when a tax year starts in April? Over what period will my income be assessed and when will I have to start paying child benefit back?

Unfortunately for an already complicated system, this confuses things further. It means that there will be a charge for the first three months of this year and this will be based on your income from January.

Your first self-assessment tax return - for 2012 to 2013 - will be due in January 2014 and the second one (which will calculate the charge from the full year from April 2013 to April 2014) will be due in January 2015. 

Those hit by the child benefit charge can choose to pay it in a lump sum, or through your tax code from 6 April 2013.

If you want to pay via your tax code you will need to contact the HMRC in April 2013 and then your tax code will be adjusted accordingly.

They will replace any earlier tax code for the 2013-14 tax year. Even if you choose to pay through your tax code you will still need to complete a self-assessment tax return.

I know my salary, but what can I take off to reduce my income this is calculated against?

The taxman will use something called 'net adjusted income' to decide how much child benefit should be paid back.

First you need your total income from all your taxable sources of income, adding in any taxable benefits, including a company car or medical insurance. You can find this information on your payslip.

Then you can deduct certain reliefs, such as trading losses, and payments made gross to your pension scheme.

That gives you your net income - now this is 'adjusted'.

You can deduct the amount of any Gift Aid payments you make grossed up at the basic rate of income tax, so for every £100 you paid you can deduct £125 from your income.

Take off pension contributions under the 'relief at source' scheme, this is where your pension provider has already given you tax relief at basic rate, ie many defined contribution work schemes. At this stage you can deduct the amount of the contributions grossed up at the basic rate of income tax, so for every £100 you personally paid in you can deduct £125 from your income.

The final total is your 'net adjusted income'

This seems very complicated, how can you calculate what you owe?

You can work out what you owe using the calculator on the HMRC website. There is also more information on how the changes could impact you here - www.hmrc.gov.uk.

Fun and games: The changes are complex and mean that some will now have to complete self-assessment tax forms.

I earn more than £50k but less than £60k, should I just give it all up?

Until you earn £60,000 the high income child benefit charge will never reach the full amount of child benefit you are being paid.

Whether you opt to give it up depends on how much you could get. You need to work this out and see if it is worth collecting it and then filing a self-assessment tax return.

For example, if you earn £51,000 and have three children you would earn £2,449.20 in child benefits, then this year you would have to pay a 10 per cent charge of £612.30 (the benefit that is paid between January to April) back. So you would just need to pay £61.23.

For the tax year 2013/2014, you would need to pay 10 per cent of the full year of benefits, so £244.92 out of £2,449.20 back in the form of a charge.  

If this is the case you may consider that it’s worth receiving the benefit and paying back the charge. After all in a full year, you will still be getting a shade more than £2,200 in child benefit.

However, if you earn £58,000 and have three children (receiving a total of £2,449.20 in child benefit), this year you would have to pay back 80 per cent of £612.30 (the amount of benefit paid between January to April), or £489.84.

This would rise to £1,959.36 in the next tax year as you are paying the charge on the full April to April child benefit payment. In a full year you would still be getting £489.84.

If you earn £58,000 and have only one child, however, you would get £1,055.60 in child benefit and once you have lost 80 per cent of that you would only be getting £211 per year or £4 per week.

I earn more than £60k is there any gain to be had in keeping child benefit income then paying it back at a later date?

Yes, but it might be a lot of hassle. In theory, you could collect the money and then put it into a high paying savings account to then use to pay back when it comes to filing your self-assessment form in January 2013. 

However, high paying savings accounts are few and far between nowadays and the money you would make would be minimal for the potential trouble you could cause yourself by further complicating an already complex system.

I have had a pay rise this year that pushed me above £60k, but I won’t have earned that for the full year, so can I keep some child benefit?

It depends. The charge is based on your tax-year income, which is why it is paid back via a self-assessment form. You will need to calculate how much you will earn in total for 2012 to 2013, ie before pay rise and after pay rise added together, and see if this pushes you above the £60k figure. 

The same thing will apply for any pay rises that send you over the limit in years to come.

I am near the thresholds what can I do to reduce my income and keep the child benefit?

If you are near the thresholds there are a number of ways that you can reduce your income to keep the benefit.

Childcare vouchers

You can ask your employer if they offer childcare vouchers to help you with the cost of childcare. You won’t pay tax or National Insurance on up to £55 a week. This limit applies to higher rate taxpayers who were members of a scheme before 5 April 2011, those who joined afterwards get a maximum of £28 per week.

The limit applies regardless of how many children you have but does apply to both parents, so you could get up to £110 a week in all.

If this comes in the form of vouchers it can be offered through salary sacrifice in which case it will deduct the amount you wish to claim from your salary in exchange for the voucher. This can be used to reduce your income to below the threshold.

Pension 

Contributions to your employer’s pension scheme (including extra voluntary contributions you make) can be made from your gross pay, before any tax is charged. This will reduce your net income.

You can increase how much you pay to reduce your salary below the £50,000 or £60,000 threshold.

Salary sacrificed payments into a pension scheme, or personal pension, where you give up some of your wages in return for your employer paying this into your retirement fund, will also reduce net income

Read a full explanation of the trick to boost your pension and keep child benefit.

Give more to charity

For every £100 you give, Gift Aid means the charity receives £125. You will have reduced your net adjusted income by £125.




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