Colin Batchelor, head of pensions technical at Legal & General Savings, explains how to help your clients navigate the imminent arrival of the child benefit income tax charge
Remember the abolition of the 10% tax band? The initial announcement did not really capture the headlines, it was only when it was due to be implemented that people really started to think about what it would mean for them.
We are only months away from the introduction of the new child benefit income tax charge and I wonder whether we will see a similar reaction when this tax comes into effect next January? Even according to government figures, the tax will affect 1.2 million families.
In the last Budget, the chancellor of the exchequer set out how the child benefit income tax charge is to work. The new income tax charge will be levied on “high earning” taxpayers who receive child benefit themselves or whose partner receives child benefit (child benefit is usually paid to the mother). If both partners have taxable income of more than £50,000, the charge will apply to the partner with the highest income.
Imminent arrival: the child benefit income tax charge
The tax charge will be tapered so that for every £100 earned over £50,000 a 1% tax charge will be imposed. Where one parent has adjusted net income exceeding £60,000 all the child benefit will be lost.
The child benefit income tax charge is deemed by many as unfair because it requires just one parent to have taxable income exceeding £50,000 before the charge is applied whereas a couple, both of whom receiving taxable income of £45,000, would be unaffected.
How is the charge calculated?
The first step is to calculate the total income assessable to income tax, which includes: earned income from employment; profits from self-employment; pensions income; income from property; savings and dividends.
From this total figure it is possible to deduct certain items, including: gift aid contributions to charity and pension contributions.
Joshua and Jennifer have three children aged 10, 7 and 4. Jennifer does not work and has no income except for the child benefit, which is paid to her. The child benefit received is £47.10 a week (£2,449.20 a year). From the point the new tax will apply (7 January 2013 to the end of the tax year) Jennifer will receive £612.30 child benefit. Joshua has several forms of income:
Income from employment £46,000
Bank interest £ 1,000
Dividends £ 3,000
Total income (before an annual bonus) £50,000
On 31 March 2013 Joshua receives an annual bonus of £10,000
Total income including bonus £60,000
The next step is to calculate the rate of the child benefit tax charge.
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