Child Benefit Cuts in 2013
Changes in tax or benefit allowances frequently cause disagreements and heated public debate. The latest case regarding the reduction in Child Benefit is clearly no exception.
The Child Benefit cuts introduced by Chancellor George Osborne in the 2012 Budget withdrew Child Benefit allowance from “high-income” families and is already causing controversy.
Previously, all households, regardless of income, were entitled to receive Child Benefit. This allowance is worth £20.30 a week for the eldest child and £13.40 a week for all other children thereafter. However, due to the recent changes, this payment is now income dependent and classed as an income based benefit. Practice principals and dental practitioners who have children, or who are thinking of having children, would be advised to take note, as this may affect you and your household finances.
Earning more than £50,000 a year?
This latest benefit cut is set to concern professionals who are categorised as ‘high-earners.’ Families where one parent is earning more than £50,000 a year will no longer be able to claim the total amount of Child Benefit. Furthermore, if one parent earns over £60,000 the Child Benefit allowance will be cut completely.
The reform raises questions as it only focuses on the income of one parent. Households with two incomes can earn anything up to £100,000 annually and still legitimately claim all of their Child Benefit (provided each is earning £50,000 or less) while a one-earner couple or single parent who earns in excess of £60,000 would lose the full benefit. The Child Benefit tax cut is estimated to reduce the income of about 1.2 million families, thereby saving the Government approximately £1.5 billion a year.
When does the change come in to place?
January 6, 2013, was the cut off point for ‘high earners’ to opt out and cease receiving Child Benefit allowance, and from January 7, 2013, the Child Benefit system became means tested. High earners who did not choose to opt out and so continue to receive Child Benefit allowance must declare it on a self-assessment tax return. They will then have to pay back some or all of the benefit via the new High Income Tax Benefit Charge (HITBC).
This means that families with any one individual earning more than £50,000 a year still receive Child Benefit but will have to reimburse some of it. An individual earning £60,000 receiving Child Benefit must repay the complete entitlement through the HITBC. Any working parent who has income in excess of £50,000 should have already received a letter from HM Revenue & Customs (HMRC) to explain how the latest cut will affect them.
How would this affect you?
To illustrate the consequences of this reform let’s say a principal dentist or practice owner earning over £60,000 has two small children. S/he is set to lose approximately £1,750 a year. The personal financial costs of this policy are evident from the cumulative quantity of this figure over the next 16 years, and highlight what young families stand to lose, following its introduction.
What can you do to reduce the effect of this tax cut?
There are numerous legitimate ways to try and lessen the impact of the Child Benefit cuts. Child Benefit is assessed based on “adjusted net income.” Individuals can reduce their taxable income by directing more money into their pension, charitable contributions, childcare vouchers or into salary-sacrifice schemes. Although this would reduce the take-home salary every month, it would help to maintain some, if not all, of their allowance.
By taking advantage of these techniques, practitioners can boost the amount of Child Benefit that they are permitted to collect. Take a look at HMRC’s guidelines; estimate your new income, and if you put money aside you will be ready for any possible reduction in your household earnings.
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