Tax warning: Basic-rate taxpayers may now be hit by ‘high income’ tax charge

Martin Lewis explains who is eligible for Child Benefit

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This controversial tax charge was introduced in 2013, following initial proposals announced by the then Chancellor George Osborne in October 2010 for withdrawing Child Benefit from higher-rate payers. The tax charge enables the Government to claw back Child Benefit through the tax system, from families where earners have an individual income of more than £50,000.

Government guidance explains: “You may have to pay a tax charge, known as the ‘High Income Child Benefit Charge’, if you have an individual income over £50,000 and either:

  • You or your partner get Child Benefit
  • Someone else gets Child Benefit for a child living with you and they contribute at least an equal amount towards the child’s upkeep.”

It doesn’t matter if the child who lives with them isn’t their own child, the tax charge will still apply.

If two people in a household have an individual income of more than £50,000, then the person with the higher income of the two would be responsible for paying the tax charge.

So, what counts as income?

To calculate if the income is over the threshold, a person will need to work out their “adjusted net income”.

This is the total taxable income before any personal allowances and less things such as Gift Aid.

It’s possible to use the Child Benefit tax calculator to get an estimate of adjusted net income on the GOV.UK website.

If a person’s income is over the threshold, they will have two options.

This is either get Child Benefit payments and pay any tax charge at the end of each tax year, or to waive Child Benefit payments, and not pay the tax charge.

Those who opt for the latter can still fill in the Child Benefit claim form, allowing them to waive the payment but still claim National Insurance credits, which count towards one’s state pension.

On April 6, 2021, changes to Income Tax rates and bands came into effect, as the new tax year got underway.

It was the final increase ahead of Chancellor of the Exchequer Rishi Sunak’s four-year freeze coming into force.

This will last from 2022/23 to 2025/26.

Now, taxable income of up to £12,570 fits into the Personal Allowance, and this amount can be earned without Income Tax being payable.

The basic rate tax band covers taxable income of £12,571 to £50,270, and this portion of income is subject to a 20 percent tax rate.

As such, some basic-rate taxpayers may find themselves subject to the High Income Child Benefit tax Charge.

Meanwhile, the higher rate band covers taxable income of £50,271 to £150,000 – charged at a 40 percent tax rate.

The additional rate band applies to taxable income over £150,000, and it is subject to a 45 percent tax rate.

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