Child benefit payment shock for thousands of households

Thousands of parents in Scotland are to be told they must opt out of receiving child benefit payments or face having them clawed back through tax charges from next year.

HM Revenue & Customs is preparing to send letters to families affected by changes to child benefit that come into force in January. Experts have warned that the new rules could cause chaos and confusion, with some families losing out on benefits to which they are still entitled or even hit with tax penalties.

More than one million families are likely to be affected by child benefit changes that take effect on 7 January next year. The benefit is currently paid to all households with children at a rate of £20.30 a week for the eldest child and £13.40 a week for other children. Families with three children will lose up to £2,449 a year from January.

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The payments are being reduced gradually for households where at least one person earns more than £50,000 and taken away entirely above the cut-off point of £60,000. Families where a parent has income between £50,000 and £60,000 will have the benefit clawed back through a tax charge, with 1 per cent of the benefit taken away for every £100 of income over £50,000.

The rules were announced last year and attacked for an anomaly that means a household with total income of £98,000 but where both parents earn £49,000 will still get the benefit, while a household with a single earner on more than £50,000 will lose some or all of it.

The first letters informing families of their options are being sent out in October. They will outline a choice between no longer claiming the benefit from January, or claiming it and, where relevant, having some or all of the benefit clawed back by the tax office through self-assessment. Many are likely to relinquish the benefit altogether rather than deal with the complicated tax system, according to Neil Whyte, tax partner with accountants and business advisers PKF:

“For many couples where the £60,000 earnings threshold is expected to be exceeded by one person, it is likely to prove simpler to opt out of receiving child
benefit initially – rather than risk errors arising through a tax code adjustment.”

There may also be national insurance complications for parents claiming child benefit and who have given up work to look after children, said Whyte.

That’s because parents staying at home to look after children under the age of 12 and who are entitled to child benefit also qualify for class 3 national insurance credits in order to maintain their contributions record. HMRC advises those 
parents to claim child benefit for any new children even if they don’t receive the payments, so they can qualify for national insurance credits.

“Fortunately, those who register for child benefit can also now elect for
benefit payments not to be made, and thus can avoid the need for clawback from a spouse or partner earning over £50,000,” said Whyte.

Households where incomes fluctuate around the £50,000 to £60,000 band face the biggest problems, with potential tax penalties for under or overpayments.

“Clearly these changes will adversely impact upon some households with lower incomes than others due to the anomaly of the income threshold,” said Whyte. “As ever it is important not to ignore any letters which HMRC issue and to seek advice if you are confused about how these changes will affect you.”