The high-income child benefit charge - do you owe HMRC money?

The clumsily named high-income child benefit charge (HICBC) was introduced in 2013 to allow HMRC to use the tax system to recover child benefit paid to households where at least one partner is a ‘high earner’. The calculation and collection of the charge is problematic, and it is clear that the clawback of child benefit in appropriate circumstances is being missed in many cases, both by HMRC and taxpayers.

This matters because, as a result, it is likely that some families have a tax liability they know nothing about. 

Who is liable to the charge?

Where child benefit has been received and one or both of the partners in the family has income of more than £50,000 in a tax year, the higher earner must pay a HICBC equal to the ‘excess’ benefit received.

The system relies on taxpayer’s self-assessing the liability, which means they need to know if the charge applies to them. This requirement contradicts the UK’s long-standing policy of independent taxation, under which taxpayers have a right to financial privacy even from other members of their household. 

Understanding whether they have a liability to the HICBC requires the high earner to know that child benefit is being received (this will not always be the case as claimants can opt to not receive it) and that their income is higher than that of their partner. This will potentially be a problem for any relationship where finances are managed independently and can be a particular concern for claimants who have no financial independence other than through the receipt of child benefit.

Is the charge fair?

The HICBC could also be considered unfair in its general application. If two partners each earn £40,000 the HICBC will not apply, but if one earns £60,000 and the other nothing, a repayment of benefit is required, even though the overall family income would be lower in the latter case.

The number of families potentially falling foul of these rules may rise sharply this year as inflationary pay rises push more people above the £50,000 income limit, with the HICBC therefore affecting more families at a time when finances are already being squeezed.

A small, but limited, win for the taxpayer

In a related development, the Court of Appeal has recently upheld an appeal by one taxpayer, Jason Wilkes, who argued that HMRC was not entitled to recover overpaid child benefit from him because the HICBC could not be assessed under the provisions HMRC relied upon. However, the practical effect of the decision is very limited. Parliament has already changed the rules to stop anyone else using the same argument unless they had lodged an appeal before 1 July 2021. However, the underlying issues with the HICBC have still not been addressed, despite being well-known for some time, and with pressure on government finances it seems unlikely that this will change in the near future.

Keeping tax affairs in order

This means the existing problem may well only get worse. HMRC will pursue the HICBC and will charge interest and potentially penalties, with a taxpayer’s ignorance of their liability being no defence. The only answer for now is that individuals who have, or are responsible for, a child under the age of 20 and have income of more than £50,000 in the relevant tax year, should find out whether child benefit has been received so they can keep their tax affairs in order with regard to the HICBC.

For more information, please get in touch with Andrew Robins or your usual RSM contact.