15 September 2023
The high-income child benefit charge (HICBC) has been controversial since its introduction in 2013, primarily because it disproportionately affects single income households. Another constant for the HICBC has been the £50,000 annual threshold above which it applies, with recent high inflation meaning the HICBC now impacts many middle income households.
How it works
The HICBC results in a gradual clawback of child benefit received by a household where the highest earning household member has adjusted net income (total taxable income less certain tax reliefs) above the £50,000 threshold in a tax year, although some households have instead elected to not receive child benefit at all where it would be clawed back in full.
A key point of contention is that the HICBC is based on an individual’s income and not the total income of the household in receipt of child benefit. As such, an individual with no partner or a non-earning partner and adjusted net income of £60,000 in a tax year incurs an income tax charge equivalent to all the child benefit received by their household in that year, whilst a couple earning £50,000 each do not incur the HICBC at all.
A problematic approach
The HICBC has essentially turned child benefit into a means-tested benefit, as claimant households with a ‘high earner’ are required to ‘repay’ some or all child benefit received as a tax charge. Other means-tested state benefits are generally not paid until an application process has been completed, which requires claimants to provide details of their income and capital to confirm eligibility and is generally reviewed on an annual basis.
Child benefit is paid without any upfront means-testing and continues to be paid for 16 years before a child’s eligibility has to be re-confirmed. During this period, household members and their incomes may fluctuate significantly, but if any household member’s adjusted net income exceeds the threshold in a tax year in which child benefit is received, the highest earner is liable for the HICBC.
The HICBC’s uniqueness has led to it being widely misunderstood by taxpayers, causing significant practical issues. In particular, partners that keep their financial affairs separate can make it almost impossible to identify liability to the HICBC in some cases. In addition, the HICBC requires affected taxpayers whose tax affairs are otherwise wholly dealt with through the PAYE system, to have to submit self-assessment returns. We also understand that processing errors have been made by HMRC in re-starting child benefit payments subject to an election not to pay them after eligibility has been re-confirmed.
In all cases, a failure to realise liability to and assess the HICBC, possibly for several years, can result in a potentially significant tax bill for those subject to the charge, as well as exposure to penalties and interest on outstanding tax.
Given the challenges, HMRC has had to deploy significant resources to collect the HICBC, albeit with many ensuing assessments resulting in appeals to the tax tribunal, putting further strain on both taxpayers and the public purse.
The frozen threshold compounds the issues
The fact that the HICBC threshold has remained unchanged for a decade has brought more and more taxpayers within scope of the charge, to the extent that it is now likely to affect many middle earners. According to the Office of National Statistics (ONS), the median post-tax disposable household income for non-retired households was a little over £34,000 in the 2022 financial year (FY 2022). For households with a single salaried earner, this equates to an adjusted net income of more than £46,000. Even a sub-inflationary pay rise in the period since the end of FY 2022 could take that taxpayer’s adjusted net income over £50,000 and result in them having incurred the HICBC in FY 2023.
With the HICBC’s disproportionate impact on single income households already regarded by many as unfair, and the failure of pay rises to maintain living standards in the current cost-of-living crisis, it seems that many middle income households are set to have their disposable income further reduced by the HICBC.
Is the juice worth the squeeze?
The HICBC brings in a relatively modest amount of tax - in 2019-20, the combination of taxpayers electing out of receiving child benefit and those incurring the charge itself raised a little more than £1bn. In contrast, Rishi Sunak is reportedly pondering a substantial cut to income tax prior to the next general election, as well as considering abolishing inheritance tax (IHT) altogether. The income tax cut being contemplated would likely cost the Treasury more than £10bn per year and, with IHT receipts increasing significantly in recent years, abolishing it could also cost the best part of £10bn per year.
The HICBC has been problematic since it was introduced. It has been widely misunderstood by taxpayers and its application has proven incredibly difficult and time-consuming for HMRC to police. HMRC’s latest plan of action is to devise a process to collect future HICBC through the PAYE system. Whilst this may, hypothetically, simplify matters for taxpayers and HMRC, such a change is unlikely to benefit all taxpayers and setting up such a process will likely create new problems. For example, affected taxpayers may struggle to reconcile their PAYE tax deductions and determine their regular take home pay, which could cause cash flow issues. Additionally, collecting the charge through PAYE would bring employers into the tax collection process. Whilst employers are required to operate the PAYE tax code issued by HMRC, this could magnify workplace tensions.
If the government believes it appropriate to contemplate tax cuts to the tune of £10bn per year, it must also be worth considering reforming, or even abolishing, the HICBC. This could involve formally turning child benefit into a means-tested benefit with an annual review for eligibility, thereby simplifying an unnecessarily complex area of the tax system and ensuring that there are no nasty tax surprises for a large and increasing number of taxpayers.
Whether the HICBC will be subject to reform remains to be seen. In the meantime, those potentially affected should ensure they are aware of their and their partner’s income levels for purposes of the HICBC and make sure the higher earner is registered for self-assessment if appropriate. If you believe you may have an outstanding liability for prior years, it will pay to take advice to regularise your tax position.
For more information, please get in touch with Matthew Todd or your usual RSM contact.