Avoiding the child benefit trap

Who pays the HICBC?

If a family receives child benefit and the person it’s paid to or their partner has adjusted net income (ANI) of more than £50,000 for the tax year, the one with the highest income must pay the high income child benefit charge (HICBC). This is equal to 1% of the amount of the child benefit for every £100 of income over £50,000. So once income reaches £60,000 all child benefit is effectively withdrawn. For example, if your ANI is £55,000, 50% of the child benefit is clawed back.

Just one person in the couple needs to be earning in excess of £50,000, which unfairly penalises single-income households.

Are you liable?

As the HICBC depends solely on you and your partner or former partner’s circumstances, you need to work out which one of you has the highest income, and how much child benefit has been received. Often the person liable to the HICBC is not the recipient of the child benefit. It might be difficult to obtain the necessary information; perhaps you run your finances separately, or you have split up from your partner.

If you ask HMRC, it will provide limited details about your partner to help you decide if you need to pay the HICBC.

How can you avoid it?

The trick is to reduce your ANI below £60,000. Ideally to £50,000. One method, if you can afford it, is to increase your pension contributions. While it’s an additional expense the money is not lost but merely diverted into a longer term investment. Plus, of course, it increases your net income by reducing the HICBC. Another option is to make gift aid donations in this tax year or the next as there’s a carry back facility, but obviously you don’t get to keep the money.

Example. Harry and Sue have four children. Sue is a school dinner lady and receives child benefit of £3,382 in 2022/23. Harry predicts that his ANI will be £55,000, which means the HICBC will be £1,691. If Harry can afford an extra net pension contribution of £4,000 before 5 April 2023, he can eliminate the HICBC entirely. Plus, as a higher rate taxpayer, he obtains an extra 20% tax relief.

Paying any pension contributions via salary sacrifice is not only effective for reducing your HICBC but can also reduce your NI.

Avoid trouble with HMRC

Unless you opted out of receiving child benefit, you must declare any HICBC on your self-assessment tax return. If you normally pay your tax through PAYE, you should register for self-assessment by 5 October following the tax year end. Failing to register or declare HICBC will expose you to penalties. HMRC is now aggressively pursuing taxpayers who fail to follow the rules.