Higher earners with children were arguably the biggest winners from the budget after the chancellor announced a major shake-up of a tax penalty that affects many parents.
The changes to the controversial high income child benefit charge mean nearly half a million families will now be better off by an average of £1,260 a year, while 170,000 families will be removed from the tax, the government says.
What is the high income child benefit charge?
It was introduced in 2013 and is the government’s way of reducing the amount of child benefit that is paid to higher-earning parents.
Currently child benefit paid to those earning more than £50,000 a year is clawed back via the tax system on a sliding scale.
The charge has been 1% of the amount of child benefit for each £100 of income between £50,000 and £60,000. For those who make more than £60,000 the charge is 100% – they have to repay everything they have claimed.
About 373,000 people were hit with the charge in 2019-20. As of August 2022, more than 680,000 families had opted out of receiving child benefit to avoid the penalty.
What has the government done?
The charge – called a “tax on children” by some –has led to parents effectively facing total marginal tax rates much higher than the official 40% higher-rate income tax band. Some parents with three children have paid tax at 71% on earnings between £50,000 and £60,000.
Because the threshold has not moved up with inflation, more families have been drawn into paying the charge.
Now the government has said it is “not fair” that a household with two parents each earning £49,000 – a total of £98,000 – get their full child benefit, but a single-parent household earning more than £50,000 loses some or all of it.
It plans to deal with this by moving to a system based on household income rather than individual incomes by April 2026.
In the meantime it is upping the threshold at which point the charge kicks in to £60,000 from 6 April.
The rate at which the penalty is charged will be halved, so people will lose all their child benefit only once they earn £80,000.
What does that mean in pounds?
Right now, someone on £60,000 loses all their child benefit, but next tax year they will get to keep it all.
From next month, child benefit is £25.60 a week for the eldest or only child, and £16.95 a week for each additional child. That means the gain for someone with two children who makes £60,000 will be £2,212 a year. If that person has three children, the gain is £3,094.
From April, people will lose 1% of the child benefit amount for each £200 of income over the new threshold of £60,000, compared with now, when it’s 1% for each £100 of income over £50,000.
Someone earning £70,000 will lose 50% of the child benefit they are entitled to, while someone on £75,000 will lose 75%.
If that £70,000 earner has two children, in 2024-25 they will get to keep £1,106 that they would otherwise have repaid. Meanwhile, the £75,000 earner will get to keep £553 that they would otherwise have had to give up.
What about the current tax year?
These changes apply from 2024-25 onwards. The self-assessment forms that millions of people filed in January – which included a section on the child benefit tax charge – related to 2022-23. So that leaves the current tax year.
Those affected by the charge who have not opted out of receiving child benefit need to bear in mind that, when they fill in their self-assessment form for 2023-24 at the end of this year or in January next year, they will face a tax bill for the benefit they or their partner have received this tax year, so they need to budget for that.
The good news is that the government has said that in future, those affected by the charge will not have to register for self-assessment to pay back what they owe. Instead, the money will be clawed back via their PAYE tax codes. Full details of how this will work are yet to emerge.
Is there anything I should do now?
If you opted out of receiving child benefit to avoid being penalised – for example, because you were earning £60,000-plus – you need to look at whether should now restart your child benefit payments.
To do this, says HM Revenue and Customs, either fill in an online form or contact the Child Benefit Office. You need a Government Gateway user ID and password to fill in the online form. After the Child Benefit Office gets your request, it can take up to 21 days before you get your first payment.
What about switching to a system based on household income?
The government has made clear this will be far from straightforward. Income tax is assessed on an individual basis, but this plan proposes that whether you pay the charge, and how much you pay, will be based on joint household income.
The Low Incomes Tax Reform Group (LITRG) says it is “concerned the tax system is not geared up to deal with assessment based on household income, and that the changes required may be costly, complicated and difficult to achieve”.
The accountancy firm BDO said it would not be surprised if the April 2026 date was pushed back.
