The HMRC sledgehammer cracking the child benefit nut

Many families will have benefitted from their first child benefit payment in April and for some, they can rest easy that they will no longer be hit with the high income child benefit charge (HICBC), at least for now.

For the current tax year, the HICBC only applies to individuals earning an adjusted net income of £60,000 or more. The government is looking to move to a threshold based on household income, as opposed to individual earners’ income, by April 2026, but it seems unlikely that this change will come into effect before this date. Nonetheless, the increase in threshold for HICBC may mean that more people can benefit from it and consider claiming child benefit.  

Whether they choose to do so remains to be seen. The unique practical challenges of this charge are likely to be unfamiliar to the average taxpayer and the volume of litigation involving those who have got things wrong in the last year could put people off. Tax cases relating to HICBC have highlighted the various misunderstandings surrounding this tax charge and the associated monetary repercussions of failing to pay tax on time. 

There are also a number of practical challenges for taxpayers to overcome if they are looking at HICBC for the first time. Firstly, identifying the liability to the HICBC can be tricky, as it is charged based on an individuals’ adjusted net income, which can be very different to their headline salary for a number of reasons, like pension contributions and charitable gifts made under Gift Aid. Secondly, as the HICBC is charged on the higher earning partner, partners who keep their financial affairs separate can easily overlook the liability to the charge. In addition, the HICBC must be reported and paid through manually submitted self-assessment tax returns, which may be difficult for taxpayers whose tax affairs are otherwise conducted through the Pay As You Earn (PAYE) system to navigate without the help of a professional advisor. 

In cases where a liability for HICBC isn’t recognised and reported, surprise tax bills are probable, and penalties are possible. It costs the taxpayers in two ways: in non-payment of tax liabilities that are due but also the cost of HMRC and legal staff in policing the system. Collating the resources to collect the HICBC results is a mutual strain on both HMRC and taxpayers. 

Following a freedom of information request submitted by RSM UK, HMRC has confirmed that the amount of time spent by legal staff in the period from April 2023 to January 2024 was 1,852 hours. HMRC has also confirmed that the associated total direct costs of litigation staff were £54,067.

In relation to tribunals and court cases, we have identified around 30 HICBC cases which were heard between April 2023 and January 2024. The total tax and penalties at stake in these cases were c.£125,000 and c.£40,000 respectively. The average tax liability and penalty at stake for these cases heard in court was therefore c.£4,000 and c.£1,000 respectively. 

It’s clear that it is HMRC’s duty to pursue taxpayers for outstanding tax where it is due. What is also true is that HMRC is resource constrained. The complexity of the HICBC rules means valuable HMRC time and resources are spent trying to collect disproportionately low levels of tax. So, whilst the recent changes announced in the Budget are a welcome development, there is still plenty of opportunity for the rules to be reviewed and improved.