Parents face tax fines over child benefit changes

Warning for higher earners as deadline approaches. Picture: Jon Savage

High earners affected by restrictions imposed on the benefit earlier this year have until this Saturday to register for self-assessment and avoid a penalty from HM Revenue & Customs.

Rules that took effect in January under the high-income child benefit charge (HICBC) saw households where at least one earner has income of more than £50,000 lose some or all of their child benefit.

The HICBC, set out in the 2012 Budget, claws back 1 per cent of the child benefit received for each £100 of income in excess of £50,000, with the benefit taken away entirely at £60,000.

HMRC estimated that 1.2 million families would be hit by the charge, including 700,000 who would lose all of their benefit. More than 100,000 families are affected in Scotland alone.

Almost one in four families affected by the new rules and who received the benefit after 7 January this year have yet to register for self-assessment, according to HMRC.

They face fines of up to 100 per cent of the tax they owe, followed by additional penalties if they still have not registered by 31 January, 2014.

The charge was heavily criticised when it was unveiled due to an anomaly that means couples each earning £49,999 – so with a joint income of almost £100,000 – remain entitled to the benefit, while households where there is just one earner but with income of more than £50,000 lose some or all of their payments.

The backlash intensified as it became clear that by clawing the benefit back through tax returns the HICBC would drag thousands more people into the self-assessment system. Because the vast majority of workers go through the PAYE system, where their salary is paid net of taxes, they are unlikely to be signed up for self-assessment.

Around 400,000 parents have opted out of the benefit since the change was introduced rather than deal with the complexities of self-assessment.

Peter Young, partner at chartered accountants and tax advisers Johnston Carmichael, said: “Taxpayers who are already in the self-assessment system tend to be better informed as many will have been asked detailed questions by their tax advisers on their domestic living arrangements.

“However, those who are currently outside of self- assessment are most at risk and need to recognise that the burden to contact HMRC sits squarely with the individual taxpayer.”

HMRC is writing to around two million taxpayers to remind them of the deadline, including those affected by the HICBC.

“Once in self-assessment they will also need to declare all their income, such as investment income, and may be liable to pay further higher rate tax on that, if the income has not already been coded out and the tax paid through PAYE,” said Tina Riches, director at the Chartered Institute of Taxation.

Because the change took effect in January, it only applies to the final three months of the 2012-13 tax year. Parents who requested before 7 January this year to stop receiving child benefit don’t have to take any action.

The amount of extra tax for someone with income of more than £50,000 who no longer qualifies for any child benefit depends on how many children they have.

“In 2012-13 it will range from £263 for one child to £786 for four, but in 2013-14 the charge will be £1,055 for one child and £3,146 for four children,” said Young. “This is a lot of extra tax to have to pay back, especially if penalties of up to 100 per cent are also added on.”

For more information go to www.hmrc.gov.uk or call 0300 200 3310 to register for self-assessment