In just over eight weeks the Child Benefit system is changing for people who earn more than £50,000 a year.
HM Revenue & Customs (HMRC) began writing to families affected by the changes last week. A million households are about to either lose the payment entirely or have their payments cut.
But the entire proposal is riddled with complications which have left experts and parents worried about how it’s all going to work.
Child Benefit allowance
Parents can currently get £20.30 per week for the first child and £13.40 a week for subsequent children until they turn 16, or 18 if in full-time education.
Right now all families can claim this benefit, so around 7.9 million families, with 13.7 million children, are currently enjoying Child Benefit payments.
What’s changing?
From the 7th January the benefit changes will come into force.
If one parent earns more than £50,000 a year they will no longer be able to claim the full amount. When an income reaches £60,000 the benefit will stop altogether.
How will the changes work?
For those earning above £60,000, the tax charge is 100% of the amount of Child Benefit. For those earning between £50,000 and £60,000, the charge is 1% of the Child Benefit paid for every £100 of income earned between £50,000 and £60,000.
There are two options. First, you can choose to keep the payments. This means you, or your partner – whoever is the higher earner – would then be taxed on the amount and would have to fill out a self-assessment tax form and pay it back.
Alternatively you can stop the payments altogether and any entitlement you have will continue at the adjusted rate. However, as there are still so many questions about how this is going to work, it’s advisable to stay in the system, irrelevant of your circumstances as if you opt out it could be a lot harder to get it back should your circumstances change.
Confusion
The main problem is the changes are outlined for a standard two-parent, two-child family living under one roof and nothing is really explained about parents who don’t fit into this box.
Child Benefit is generally paid out to the mother. However, in many cases it will be the father who earns more money so he will have to claim it back through tax – even though he’s not the one receiving it.
Problems will also occur when it comes to divorced families. If two parents aren’t living together then it may be the case that a new partner will pay the tax on the Child Benefit while a biological parent - who has moved out of the family house - won’t have to pay towards this.
There’s also been a lot of criticism because only the income of the highest earner will be taken into account when deciding how much is paid out.
[SPOTLIGHT]This means a single parent family where one person earns £60,000 will lose everything, whereas a family where two parents earn £49,000 won’t lose anything. In the same way, a stay-at-home parent who is at home looking after children while their partner is at work will lose everything if the partner earns £60,000.
How will HMRC know if you’re in a couple?
According to the Government, a partnership is defined as; a married couple living together, civil partners living together, a man and a women who live together but aren't married or a same-sex couple living together but who aren't in a civil partnership.
However, when it comes to the Child Benefit changes, it’s expected many parents may keep the fact they’re in a partnership secret from HMRC to avoid losing out on this money.
It’s been rumoured that to conquer this HMRC will call parents and ask a series of questions to determine who is responsible for the children in question.
Although this hasn’t been confirmed, and it won't happen until at least January 2014, a House of Commons briefing paper from April detailed the different questions which could be asked. These included finding out if a couple has single or joint responsibility for the following: collecting children from school, contacting in an emergency, taking children to medical appointments, buying clothes and toys and paying for pocket money and treats.
Richard Mannion, national tax director at Smith & Williamson, explains: "Family arrangements are often very complicated these days and it will certainly be difficult for HMRC to verify whether people are living together as husband or wife – and indeed to monitor how changes may occur. This could certainly be an area where the new Child Benefit system runs into regular difficulty."
Employees who are paid yearly bonuses
For those people who do not have a fixed income, problems could occur if you choose not to take the benefit and then your income works out below the threshold. If this is the case opting to carry on receiving the benefit is the best option, as then you can pay it back if you need to through a self-assessment form.
As financial situations change, you can always let HMRC know and your payments will also be adjusted.
Can salary sacrifice help?
Entitlement to Child Benefit will be calculated after adjustments, such as salary sacrifice benefits like cycle to work, pensions and car leasing schemes, have been deducted. Therefore those already taking benefits such as childcare vouchers through these schemes may be able to hang onto their Child Benefit payments.
Higher-rate tax payers are able to sacrifice up to £124 a month in exchange for vouchers towards childcare. Therefore if you earn just over £50,000 the annual sacrifice of £1,488 could push you under the threshold. As childcare vouchers are non-taxable and National Insurance exempt, you can save up to £624 a year as a higher-rate taxpayer using them, according to Busy Bee Benefits.
For more read How to keep your Child Benefit
How do I find out what will happen to my Child Benefit?
The best thing to do is read the letter when it arrives and if you don’t receive one, but think you qualify, then get in touch with HMRC.
Letters have already been sent out to those affected, but earners who are self-employed are not being informed. Therefore many people are still unaware just how these changes will affect them. There is a tool on the HMRC website to find out exactly how much you will be entitled to and what to do in this instance.
More on benefits:
How to keep your child benefit
Government may cap Child Benefit at two children
Benefit reform: all you need to know about the Universal Credit
Can you afford to have a child?