Unearned and 'diverted' income can affect child maintenance - ​Emily Deans

Many separated parents will be familiar with the Child Maintenance Service (CMS), the UK body responsible for calculating the amount of financial support due by one parent (‘paying parent’) to the parent with whom the children primarily reside (‘resident parent’).

They will also likely be aware that the CMS uses a statutory formula to work out maintenance obligations, largely based on a percentage of the paying parent’s gross annual income.

What parents might not be aware of, however, are the sources of income the CMS includes as part of its assessment, over and above income from salaries, wages, and self-employment. Inclusion of income from other sources can have a significant impact on a child maintenance assessment, meaning it is important that parents understand how the CMS will assess any additional funds which come to their attention. These other income sources are:

Unearned Income: Any taxable income (in excess of £2,500) received by a paying parent during the year, which was not included in the CMS’s initial assessment or annual review. Examples include: dividends; interest on savings and investments; and rental income

Emily Deans is a Senior Solicitor, Balfour+Manson LLP

Notional Income from Assets: Where a paying parent holds an asset worth over £31,250, and where that asset is not generating any return, the CMS is entitled to assume the asset has the potential to generate an income of 8 per cent per year. The CMS can only apply a notional income to certain types of assets, and a paying parent’s primary residence is specifically excluded.

Diverted Income: In certain circumstances, paying parents can be held to have “unreasonably reduced” or hidden their true income. These reductions are known as diversions of income. Examples include: salary redirection (such as a paying parent taking a cut in salary in exchange for a company car) and excessive pension contributions into a private or occupational pension. The issue of diverted income commonly arises where the paying parent owns and runs their own business, either as a sole director or as a person with significant control. Examples of income being diverted through a paying parent’s business include: wages being paid to third parties/family members at an inflated rate; dividends being paid to third parties; and profits being retained within the business whilst the paying parent takes a low salary.

Where an additional income source has been identified, the CMS will ascertain its total value and include it as part of the paying parent’s annual income for assessment purposes. Similarly, if the CMS considers that a parent has diverted income, they will treat the diverted income as if it had been paid directly to the paying parent.

So what do parents need to do? Where a resident parent suspects or knows that their ex has further income streams which have not been disclosed, they can apply to the CMS for a variation of their assessment. If successful, a variation will likely lead to an increase in child maintenance due.

On the other hand, where a paying parent believes the CMS has incorrectly calculated the level of income received from other sources, they can ask the CMS for a supersession of their assessment. If successful, this will likely lead to a decrease in child maintenance due.

Family lawyers are experienced in helping clients to understand and, where appropriate, challenge child maintenance assessments, and taking early advice in this complex area is highly recommended.

Emily Deans is a Senior Solicitor, Balfour+Manson LLP