Swindon-based chartered accountants Banks is urging higher rate tax payers to think carefully before opting out of receiving child benefit.
Under plans announced by Chancellor George Osborne, anyone earning more than £60,000 a year will lose the benefit entirely, while the amount paid to those earning between £50,000 and £60,000 will be gradually withdrawn.
“What will be confusing for people is that unless they opt to stop taking the payments, the benefit will carry on being paid,” he said.
“Anyone who receives the benefit, but is not entitled to it, either in whole or in part, will then have it taken back through an additional Income Tax charge. Even more confusing is if the benefit is paid to one parent, but it is the other parent who earns more than £50,000 it will be the second parent who has the tax charge even though they haven’t actually received the payment.
“On the face of it, opting out may seem the easiest option than having to pay back the money later via the Income Tax charge, but this could have an implication on National Insurance credits and possibly State pension entitlement.
“The whole issue is very confusing and I wouldn’t be surprised to find many people who carry on receiving the benefit when they shouldn’t and vice versa.”
The change comes into effect from January 7 next year. Any parent earning £50,000 or more loses 1% of the benefit for every extra £100 they earn, up to £60,000, at which point the benefit is withdrawn altogether. For example, someone with a salary of £55,000 would lose 50% of the benefit.
The income tax charge will be collected either through the self-assessment system or for employed people via their payroll deductions.
Paul added: “The only way to avoid the income tax charge, if you are a higher rate taxpayer, is by reducing your income, but this may not be something that people wish to look at in the current financial climate.”