It is, sadly, not uncommon for parents who think they might become liable to the high income child benefit charge (HICBC) to avoid claiming child benefit altogether, thereby jeopardising their own and their children’s national insurance position in future years. To avoid liability to HICBC, parents’ best option is to claim child benefit, then opt out of receiving any payments.
How the HICBC works
The HICBC is intended to claw back child benefit paid to claimants whose net adjusted income, or whose partner’s net adjusted income, is over £50,000 a year. Net adjusted income is net of certain expenses such as pension contributions and gift aid donations. Child benefit is progressively withdrawn by means of the HICBC where the claimant or their partner earns above £50,000 a year and is clawed back in its entirety from partners one of whom earns £60,000 or more.
The person liable to HICBC is the partner whose income exceeds £50,000, or the higher-earning partner if both incomes are more than that figure. They are obliged to notify HMRC by 5 October in the tax year following that in which they first become liable, by completing a self-assessment form even if they would not otherwise have done so. Failure to notify can attract a penalty under Finance Act 2008, Sch 41. In 2017-18, 15,319 penalties were charged to a value of £2.8 million.
How to have your cake and eat it
The have-your-cake-and-eat-it approach of claiming (but not receiving) child benefit and yet avoiding the HICBC is perfectly legitimate, and was facilitated by legislation as part of the original HICBC design. Finance Act 2012, Sch 1, para 3 added a new section 13A to the Social Security Administration Act 1992, under which a person who is entitled to child benefit may elect not to be paid the benefit if they reasonably expect that, in the absence of the election, they or another person would be liable to a HICBC.
The election is made by the claimant completing a form online or telephoning or writing to the Child Benefit Office. It generally has effect for payments of benefit made for weeks beginning after the election is made, but where entitlement is backdated, the election may have effect for up to three months before the claim for benefit is made.
The election can be revoked no later than two years after the end of the tax year in which the revocation is to take effect. It may be timely just now for some families to revoke an election, particularly if, given the current situation their annual income has dropped below £50,000, so that they can start to receive child benefit without being liable to HICBC.
Making the election means that the claimant, usually the child’s mother, preserves her entitlement to national insurance benefits such as the state retirement pension. If she claims child benefit, she can be credited with national insurance contributions until the child reaches the age of 12. A claim also ensures that the child receives a national insurance number (NINO) automatically when he or she is 16. If the child does not receive a NINO, he or she can still ask HMRC for it when needed, and one will be given on proof of identity; but if the claimant loses out on national insurance credits, that could mean a reduced state pension.
It is equally important who claims the benefit. Where one partner works and the other stays at home to look after the child, the non-working partner should claim, because the working partner is already paying NICs and the NI credits would simply be wasted if they were assigned to him or her.
Since the HICBC was introduced, there has been a sharp decline in the numbers claiming child benefit. The biggest decline was between 2012 and 2013, when 370,000 fewer families claimed child benefit, equating to 650,000 fewer children, a drop of about 5% of the total numbers receiving the benefit. In 2018-19, the latest year for which data is available, 354,000 people both claimed child benefit and were liable to the HICBC.
But since 2013 there has been a steady increase in the numbers who claimed child benefit and then opted out of receiving it, thereby avoiding liability to HICBC, from 397,000 in 2013 to 582,000 in 2019. This may be the result of greater awareness, but could also be accounted for by fiscal drag, the HICBC thresholds having remained at £50,000 and £60,000 since the introduction of the charge.
The Office of Tax Simplification considered the problems discussed above in its report Taxation of Life Events (October 2019) and made the following recommendations:
- The government should review the administrative arrangements linked to the operation of child benefit, making clear the consequences of not claiming the benefit, with a view to ensuring that people cannot lose out on national insurance entitlements.
- The government should consider the potential for enabling national insurance credits to be restored to those people who have lost out through not claiming child benefit.
- The government should consider how to ease the process of enabling children of those who have not claimed child benefit to receive their national insurance number.
Unless and until those sensible recommendations are implemented, the advice to clients facing a HICBC liability should, in summary, be:
- don’t disclaim child benefit because otherwise the national insurance entitlement of the non-working partner will suffer;
- do claim child benefit but opt out from receiving payment;
- if only one partner is working, make sure the benefit is claimed by the non-working partner.