The HICBC has been an area of contention since it was first introduced in January 2013, which saw child benefit withdrawn gradually for families where at least one parent earns more than £50,000 a year. If one person earns more than £60,000, child benefit is stopped entirely.
The charge is equal to 1 per cent of child benefit received for every £100 of income that is more than £50,000 each year, and currently those faced with the HICBC must submit a self-assessment tax return each year.
However, the government’s recent announcement moves to take the onus away from higher earners having to remember to pay back part or all of their child benefit and complete a tax return, instead clawing back the tax charge via people’s tax codes.
This is a welcome change as we should see fewer people inadvertently fail to pay the charge, and it will also help to simplify the tax affairs of those affected.
While this change is a positive, albeit there are complexities still to be addressed, the government has a way to go in terms of making it fair. Basic rate taxpayers are intentionally impacted by this perverse charge, and single income households — often hard-working single parents — are unfairly penalised.
In addition, not only does the HICBC unfairly impact basic rate taxpayers, but had the threshold moved in line with inflation since its introduction in 2013, then it would currently sit at £65,000.
However, the current HICBC looks as though it is here to stay for at least the time being, and it presents an opportunity for financial planners to offer real value to their clients through careful, tax-efficient planning and a keen awareness of the rules.
Mitigate the charge through tax efficient planning
A couple each earning £49,999 would have no reduction in their child benefit, but a single parent earning more than £50,000 will start to lose part of the payment. While this is unfair and we would hope to see a rule change or at the very least a change in threshold, clients will need to be prepared for the current rules and some may need to make adjustments to their plans to ensure they are as tax efficient as possible.
Not only does the HICBC unfairly impact basic rate taxpayers, but had the threshold moved in line with inflation since its introduction in 2013, then it would currently sit at £65,000
What is more, wage growth has pushed salaries up in response to significant inflation in the past few years, so checking in with clients to see if they are newly impacted by this charge will be very important as there are steps they can take to help mitigate it.
It is important to remember that the HICBC only applies to a client’s “adjusted net income”, which includes all income subject to income tax, including income from employment, profits from self-employment, and income from property, savings and dividends. Income from tax-free investments such as Isas is excluded.
There are several simple planning techniques that can help:
- ensure savings are held, where possible, in a tax-efficient product, for example an Isa;
- for spouses and civil partners, ensure non-Isa savings and rental properties are held as efficiently as possible, either jointly to share the income or in the name of the lower earner;
- making additional pension contributions to lower overall income avoiding the £50,000 threshold.
Some of these will not be right for everyone, but it will be the role of financial planners to help guide their clients towards making the most tax-efficient choices for them while continuing to meet their other personal finance goals.
Check NI contributions are correct
As well as reducing or entirely mitigating the HICBC where applicable, financial planners should also support their clients in ensuring they are receiving the correct national insurance contributions if they are not claiming child benefit.
This is because the process of claiming will opt them in to receive NI credits if they are not working, and therefore they have to fill out a form to confirm they are not claiming, but still opt in for NI credits.
Thousands of parents have missed out on claiming their rightful benefits over the years due to taking no action, often due to a simple lack of awareness, and they risk reducing their state pension when they reach retirement age. This is particularly problematic for stay-at-home parents or those with low incomes, who rely heavily on these NI credits to maintain their pension entitlement.
Positively, the government has committed to legislate to allow eligible individuals to retrospectively claim NI credits. More detail is set to be published, but this could make a real difference to the quality of life your clients have in retirement if they would otherwise have unduly missed out on some or all of their state pension.
Shaun Moore is a tax and financial planning expert at Quilter