The Child Benefit Trap: the High-Income Child Benefit Charge

By Graham | February 8, 2023

As parents, it is important to understand the potential implications of receiving Child Benefit and the impact it may have on your tax liability. With increasing inflation and wages, many may find themselves in a higher tax bracket, leading to the possibility of falling into the “Child Benefit trap.” In this article, Mercian Accountants will provide an overview of the Child Benefit and earnings threshold, how the tax is calculated, the consequences of opting not to receive the benefit, and ways to reduce your tax liability. Whether you are a parent or planning to be one in the future, this article will help you understand the steps you can take to avoid the Child Benefit trap.

The increase in inflation and wages can push individuals into higher tax brackets, causing implications for parents receiving Child Benefit.
We provide an insight into the impact of increased earnings on tax liability and steps to avoid the ‘Child Benefit trap’.

Child Benefit and Earnings over £50,000

If either parent earns more than £50,000 a year before tax, they will have to pay back some or all of the Child Benefit in the form of extra Income Tax.

Impact on Parents

The tax on Child Benefit for those earning over £50,000 is based on each parent’s individual income, not the combined household income.
If one parent earns over £50,000 per year, the higher earner will have extra tax to pay (High-Income Child Benefit Charge) but the Child Benefit amount will still be paid.
If either parent’s income exceeds £60,000, the extra tax will cancel out the Child Benefit amount.
Parents with an income below £50,000 will receive the Child Benefit in full, with no extra tax to pay.

High-Income Child Benefit Charge Calculation

For every £100 of income above £50,000, 1% of the Child Benefit amount needs to be paid as the ‘High-Income Child Benefit Charge’ via a self-assessment tax return.
The Government provides a calculator to work out the amount of tax due: https://www.gov.uk/child-benefit-tax-calculator/main.

Opting Out of Child Benefit

Parents can choose not to receive the Child Benefit, avoiding the payment of extra tax.
However, it is recommended to still ‘claim’ the benefit to accrue National Insurance (NI) credits, which are important for State Pension eligibility.
Parents can still opt not to receive the actual payment while still claiming the benefit.

Reducing Tax Liability through Salary Sacrifice

It is possible to avoid the extra tax by reducing taxable income through pension contributions, childcare vouchers (if supported by the employer), or charitable donations.

Contributing to a Pension to Reduce Income

Pension contributions made from pre-tax income reduce taxable income, which can help avoid the High-Income Child Benefit Charge.
Pension contributions for those with earnings above £50,000 will attract 40% tax relief and can be reclaimed via self-assessment.
Example: An individual with an income of £53,000 can make a pension contribution of £2,400, which will increase to £3,000 with 20% basic rate tax relief. This will reduce their income from £53,000 to £50,000, avoiding the High-Income Child Benefit Charge and reducing the cost of the pension contribution to £1,800.

Table of Contents

Other Child Benefit information

Eligibility criteria for Child Benefit: It is important to understand the eligibility criteria for receiving Child Benefit, including age of the child, residency requirements, and other conditions that must be met.
How to claim Child Benefit: Parents should know how to claim Child Benefit, including the process of filling out the claim form and providing the necessary information and documents.
Payment schedule for Child Benefit: Parents should be aware of when Child Benefit is paid and how often, as well as the amount they are entitled to receive.
Tax credits and Child Benefit: It is essential to understand how Child Benefit may affect other tax credits or benefits, such as Working Tax Credits or Universal Credit.
Changes to Child Benefit: Parents should be aware of any changes or updates to the Child Benefit rules and regulations, including changes to the amount paid or eligibility criteria.
National Insurance credits: As mentioned in the article, claiming Child Benefit even if not receiving the actual payment can help accrue National Insurance credits. It is important for parents to understand how National Insurance credits affect their State Pension and what the minimum requirement is to receive anything from the state.
Other ways to reduce tax liability: Apart from salary sacrifice, parents should be aware of other tax-efficient ways to reduce their tax liability, such as using ISAs or making charitable donations.

It is important to consider seeking professional advice from an Accountant to fully understand the implications of Child Benefit and how to navigate the tax system effectively.

Helpful Accountants for Parents

Receiving Child Benefit can have significant implications on your tax liability, particularly if you or your partner earn more than £50,000 per year. It is essential to understand the rules and regulations surrounding the Child Benefit and the impact it may have on your finances. Mercian Accountants are here to help you navigate this complex area and provide you with practical solutions to reduce your tax liability. Don’t let the Child Benefit trap catch you off guard, take control of your finances today. If you have any questions or concerns, please don’t hesitate to reach out to us. We are here to provide you with the support and guidance you need to make informed decisions for you and your family’s future.