High earning parents are the biggest beneficiaries of the latest budget adjustments, as the chancellor announced a major restructure of a tax penalty that is set to have an impact on many parents. As a result of the contentious modifications to the high income child benefit levy, the government claims that 170,000 families will no longer be subject to the tax, improving the average annual income of over half a million households by a yearly £1,260.Â
What does the High Income Child Benefit Charge Entail?
The government first implemented the charge in 2013, as a means of cutting back the amount of child benefit given to parents with higher incomes.
At the moment, child benefit payments made to those making over £50,000 annually are refunded on a sliding scale through the tax system.
The fee has been one percent of the child benefit payment for every £100 of income in the range of £50,000 and £60,000. The charge is 100% for those whose income surpasses £60,000; they are required to pay back all of their claims.
In 2019-20, over 373,000 people were charged. While more than 680,000 households choose not to receive child benefits as of August 2022 in order to avoid the sanction.
What Actions has the Government Taken?
Parents now effectively face total marginal tax rates much greater than the official forty percent higher-rate income tax bracket due to the levy. Some parents between £50,000 and 60,000 were required to pay a tax at the rate of 71%.
As a result of the threshold not rising in the line with price inflation, more households are being forced to pay the fee.
The government has now declared that it is unfair that a family with a single parent making more than £50,000 loses a portion or all of their child benefit, but a family with two parents earning £49,000 apiece, or a total of £98,000, receives it all.
In order to address this, the government plans to transition from an individual income-based system to one based on household income by April 2026.
Meanwhile, it is increasing the threshold, which will cause the charge to start on April 6 at £60,000. The penalty rate will be cut in half, so that people won't lose all of their child benefit until they make £80,000.
How Much Will Families Save?
Currently, a person making £60,000 loses all of their child benefit; however, they will be able to keep it all the following tax year.
Child benefit will be £25.60 per week for the first or only child starting next month, and £16.95 per week for each additional child. That implies a gain of £2,212 annually for a parent earning £60,000 and having two children. The gain is £3,094 if the person has three children.
Instead of receiving 1% for every £100 of income over £50,000, as it is the case currently, in April, recipients will lose 1% of their child benefit for every £200 of income over the new £60,000 level.
A person making £70,000 will forfeit 50% of their eligible child benefit, while a person making £75,000 will lose 75% of it.
In 2024-25, the earner making £70,000 who has two children would be able to keep £1,106 that they would have otherwise had to repay.
The individual earning £75,000 will retain £553 that would otherwise be forfeited.
Will the Changes Affect the Current Tax Year?
These modifications will take effect in 2024–2025. The self-assessment forms pertaining to 2022–2023, that millions of people filed in January, featured a section on the child benefit tax charge. So this leaves the present tax year.
Individuals impacted by the charge who have not chosen to decline child benefit should be aware that they will be responsible for paying taxes on any benefits they or their spouse received during the current tax year when they file their self-assessment form for 2023–24 at the end of this year or in January of the following year.
On a positive note, the government has announced that anyone impacted by the charge would no longer need to register for self-assessment in order to repay their debts. Rather, their PAYE tax numbers will be used to recover the funds. The intricacies regarding how this will operate are still to come.