NICs and the high income child benefit charge

The high income child benefit charge may have dissuaded taxpayers from claiming child benefit. Those who fail to claim are missing out on potentially valuable contributions to their NIC record.

 

On 26 July 2018, the Treasury published correspondence between the Treasury Committee and HMRC, raising concerns that parents who have not claimed child benefit are potentially missing out on part of their future state pension.

 

The high income child benefit charge (HICBC) was introduced on 7 January 2013 in order to restrict the availability of child benefit for higher earners and their partners. The charge is triggered where a person’s adjusted net income (broadly, taxable income before deduction of the personal allowance, less adjustments for gift aid and pension contributions) exceeds £50,000. 

 

For every £100 of adjusted net income over £50,000, the charge claws back 1% of the amount of child benefit. Where adjusted net income exceeds £60,000, 100% of the amount is withdrawn.

 

Where the charge applies, the higher earner will need to declare the child benefit payments in a self-assessment tax return.

 

Individuals or their partners may elect not to receive child benefit, to avoid having to pay the charge and comply with the administrative requirements. Some may simply not make a claim for child benefit at all. Although this might seem logical (why bother to receive the payment only to have to declare it and then pay it back?) not making a claim at all creates a problem.

 

Individuals who make a claim for child benefit for a child under the age of 12, but then elect not to receive the payments, are entitled to Class 3 National Insurance credits, helping to preserve their NIC record and counting towards the state pension. Individuals who do not make a claim, however, do not receive the NI credits.

 

 

To avoid this problem, the non-earning partner should make a claim for child benefit and then elect not to receive the payments, thus preserving his or her NIC record (a single, higher-earning parent will of course pay NICs anyway).

 

The interaction between NICs and child benefit reveals a further problem. Where one partner does not work, but the earning partner claims the child benefit, the non-working partner (who is caring for the children, and potentially a non-earner) will not receive the NI credits.

 

Many of those eligible for child benefit are unrepresented. Although HMRC statistics show that in 2017 over 7m families received child benefit payments and over 500,000 opted out, it is not clear how many eligible individuals simply decided not to claim child benefit in the first place. HMRC may want to redouble their efforts to communicate directly with taxpayers.

 

 

The key point is to make sure clients who are in scope of the HICBC (or whose income brings them near to the £50,000 threshold) are aware of the options. Clients or their partners may well wish to make the claim for child benefit, but elect not to receive the payments.

 

It is worth remembering that personal circumstances can change. For example, a client may decide (or be forced) to change jobs and to take lower-paid employment in the future. Protecting the NI record for the non-earning partner, and the entitlement to state pension, will be particularly important. 

 

For clients whose income fluctuates above and below £50,000 or, at the end of the year, turns out to be lower than anticipated, an election to stop receiving child benefit payments can be revoked.

 

Those who claim child benefit and receive the payments will need to comply with the HICBC. Clients who do not currently file a tax return will need to do so. Advisers may also wish to remind clients that, even where all of their income is already taxed under PAYE, there may be other reasons to file a tax return, for example to claim higher rate relief on contributions to an occupational pension scheme. For those who already file a return, the additional compliance burden would seem small.

 

Several organisations provide advice for unrepresented taxpayers, including Revenue Benefits (revenuebenefits.org.uk) and the CIOT’s Low Incomes Tax Reform Group (litrg.org.uk).

 

Dan Meredith (daniel.meredith@lexisnexis.co.uk), Tolley