Child Benefit In The UK: What You Need To Know

25 October 2010

child benefit in the uk 5

The new coalition government is implementing one of the biggest changes to be made to child benefit in the UK since it first began. It plans to cut the benefit for the children of parents who are in the higher tax bracket - 40%. On the surface it seems straightforward enough. If you are in the higher tax bracket you won't receive child benefit. If you aren't in the higher tax bracket you will.

But nothing's ever that simple is it? Here's the PlayPennies low down on how the cut to child benefit in the UK might affect you and what it all means.

When and why?

child benefit in the uk 4The changes will come into effect in April, 2013. So you've just over two years to prepare for the changes. Reports vary a little on just how much money the government is going to save with this change. The initial estimate had the cut affecting 1.2m families, with a saving to the government coffers of £1bn. More recently, reports have revised this to 1.5m families and a total saving of £2.5bn.

What?

At the moment, all children receive child benefit, no matter how much their parents earn. That is, all children aged under 16, or 19 if in full-time education. Child benefit rates are £20.30 per week for your eldest child, and £13.40 for each additional child. A family with two children gets £1,752 a year.

The cut will affect people who are in the higher tax bracket. Earlier this month, Richard Wachman explained it like this in the Guardian. "As a result, a single parent earning more than £44,000 a year will be up to £1,750 a year worse off, according to chartered accountants Blick Rothenberg. If two parents individually earn £43,000, contributing family income of £86,000, the family will continue to receive child benefit."

child benefit in the uk 3Yes, you're reading it right. The cut is based on individual income, not on household income. It seems vastly unfair to apply a cut to a household earning £44K, and not to a household earning £86K.

The prime minister has justified this decision on breakfast TV. Cameron said that means testing income for the child benefit would be "incredibly bureaucratic and expensive and, frankly, quite intrusive". He hasn't said why household income, currently used for other benefits like jobseekers allowance, isn't as good a measure as individual income though.

For this reason, the cut to the child benefit in the UK has come under a lot of criticism. But for the time being, that's how it stands.

Who?

OK, so far so simple. Right? Now for the not-so-simple bits.

First, how much do you stand to lose exactly? According to the  Institute for Fiscal Studies, Britain’s leading independent economic forecaster, a single-income couple with two children and an income of £43,875 (just under the 40p tax threshold) will need a pay rise of £2,975 or more to ensure they are no worse off after losing their child benefit.

Now, if both parents live together (regardless of whether they are married or not married), and one earns above the threshold then neither will receive child benefit.

If the parents are separated it gets a little more tricky for the married ones. If you're separated but not divorced, and the non-resident parent earns more than the threshold, then it is highly probable that neither will receive child benefit.

child benefit in the uk 2

What if both parents live together, but aren't married? You're treated exactly the same as married couples. If either mum or dad earns within the higher tax bracket you won't get child benefit. Now, what if you're married but not living together? According to the Daily Mail, reporting from the Tory Party conference earlier this month, "if they are divorced and the parent who has custody is a lower-rate taxpayer, he or she would still receive child benefit, regardless of any maintenance arrangements."

Although the government has made a bit thing about this being less bureaucratic, easier to manage etc, it seems to be conveniently forgetting the self employed. How will it work in this instance?

If you pay tax by self-assessment as self-employed and freelance workers do, then you'll have to declare whether you receive child benefit on your annual tax return. If you earn more than £43,875 you'll lose the benefit, and be required to pay back any benefits you have received during that year.

child benefit in the uk 1

Will you lose your pension?

If you're a stay-at-home mum or dad then without a change in the law, this could have a very nasty long-term effect on your state pension. Caroline Crampton points out in her blog on the New Statesmen that since the 6th of April 2010, a new 'credit' system has been in place to ensure that time taken out of paid employment to care for a dependant isn't unfairly deducted from your state pension. She says "the criteria for receiving the new "carer's credit" is unambiguous: you are eligible if you receive "Child Benefit for a child under 12 years of age", are a foster carer, or care for a disabled person for at least 20 hours a week."

So if your partner earns £44K, and you are staying at home to look after the children, as the law currently stands you could find your state pension reduced when you retire.

Borderline?

What if you're on the borderline of the cut off threshold? Well, the cuts apply to your taxable income. So what you need to do, whether you're on PAYE or self assessment, is reduce the income that you are taxed on.
Chas Roy-Chowdhury of the Association of Chartered Certified Accountants suggests the following in the Telegraph: "leasing cars for yourself and family members, medical insurance, childcare vouchers ... are among the things you can buy direct from your gross salary to beat the Child Benefit cutbacks. Self-employed people and owners of small businesses may be able to achieve the same effect by adjusting annual profits, so they do not exceed the new annual threshold by a small amount every year but instead stay below them most years and exceed them by a large amount in a single year."
child benefit in the uk
Jane Baker at Lovemoney.com recommends using private pension contributions to lower your taxable way to below the threshold, if you're on PAYE and your wage is right on the borderline. In her example, additional payments of £1,250 reduce take-home pay by £750, and entitle you to child benefit. You'll need to read it yourself though as it all went way over my head!

TOPICS:   Banking

2 comments

  • khrest
    What I have not seen mentioned anywhere is how this impacts people with taxable benefits. In my example, I pay a small amount of 40% tax each year but my actual earnings are miles below the threshold. However my company gives me private health cover and a company car and the taxable benefit for this pushes me over the 40% threshold. There are many, many others in this situation and if they are on PAYE they probably do not even realise that they are in the 40% bracket. Therefore, somebody earning low 30k will likely lose child benefit if they have car/fuel or other benefits...
  • Lynley O.
    Yes the amount is your taxable income! I suspect that it might be worth investing in a little bit of advice if you're right on the cusp of the threshold. Otherwise I guess it is the equivalent of a rather nasty tax hike!

What do you think?

Connect with Facebook, Twitter, or just enter your email to sign in and comment.

Your comment