Child Benefit Tax Trap

The Low Incomes Tax Reform Group (LITRG) is requesting that separated couples check that their child benefit claims do not without knowing leave them exposed to the high-income child benefit charge (HICBC).

The warning is due to a recent First-Tier Tribunal decision where a parent was responsible for the charge even though the benefit was paid to their previous partner. The LITRG has also been in touch with others who face similar situations and has published guidance on what claimants can do if they find themselves in this situation.

Child benefit is always declared by the individual, not a couple. The claimant would be the person who completes and signs the form to make the claim, despite choosing their partner to get the benefit payments.

In some circumstances, years may have passed from when the initial child benefit claim was made and the separation, therefore, it is understandable that people may have forgotten who the claimant initially was and think it is the person receiving the payments.

What happens if a couple separates?

If a relationship breaks down and the couple separates, the claimant could end up being liable for the HICBC, only if their adjusted net income later goes above the £50,000 threshold, regardless of whether the payments are paid into their previous partner’s account.

A new partner of the claimant could also become responsible to the HICBC if they go above the threshold and are the bigger earner, even if they had nothing to do with the initial claim. This is due to the way the charge is worked out as it firstly looks at the adjusted net income of the person who made the claim and any partner they have.

The LITRG insists that child benefit claimants evaluate their child benefit arrangements if they have separated from the partner they had when the claim was initially made. In addition to this, claimants should check that these arrangements continue to be the right decision dependent on each of their circumstances to avoid being exposed to the HICBC.

Often, couples who have separated may decide they want the person who initiated the original claim to continue doing so, regardless of whether the payments are being paid to the other parent. However, others may choose to seek a new arrangement.

Understandably, it’s not possible to retrospectively change the name of the individual claiming child benefit to prevent the charge, the LITRG understands this, however, it is possible to stop the claim altogether for child benefit and for the previous partner to make a new claim. However again, this could lead to the previous partner or new partner being liable for the HICBC, if they earn above the threshold.

It’s important to note that if taxpayers are found responsible for the HICBC and have failed to inform HMRC, they could be faced with charged penalties, this can be appealed but only for a reasonable excuse.

Claiming child benefits can also impact an individual’s right to a state pension, due to it attracts National Insurance credits. However, these can be assigned to the other parent, although deadlines and conditions apply.

LITRG Technical Office, Tom Henderson, said:

Comment

Separation and divorce can throw your financial plans and investment arrangements into disarray and, alongside bereavement, is probably one of those times when help from a financial adviser is most needed.

A financial adviser can play a key role in divorce and help provide clarity moving forward, providing expert advice on the areas to consider and also recommending solutions to provide financial independence.