Martin Lewis explains who is entitled to Child Benefit
Now tax experts are demanding that this sneaky levy be scrapped, but so far there has been no response from the Treasury. The UK’s complex tax system is riddled with injustice and one of the cruelest quirks sees some families paying an effective tax rate of 65% on their income.
Once a parent earns £60,000 or more, they must repay the full Child Benefit.
It’s called the High Income Child Benefit Tax (HICB), a stealth tax introduced by former Chancellor George Osborne in 2013.
This affects hundreds of thousands of parents who receive child benefits and who may already be struggling due to the cost of living crisis.
Yet instead of removing the unfair levy, Sunak continues to profit from it despite growing anger from the families involved.
Family allowances are paid to parents responsible for raising a child under the age of 16 or under the age of 20 if the child is in approved education or training.
It is worth £21.80 per week for the first child and £14.45 per week for subsequent children.
Although not means-tested, if an employee in a family earns more than £50,000 a year they must repay 1% of Child Benefit they receive for every £100 of income over this threshold.
The high tax burden of family allowances can be a real shock for families
The HICB already affects around 630,000 families a year, who handed over £416m to HMRC in the 2019/20 tax year, averaging £660 each.
Yet it is unfair in several respects. First, that £50,000 threshold hasn’t risen in nine years, while the average weekly wage has climbed 29%, dragging more parents into the net every year.
The levy also hits families with only one breadwinner hard. They will incur HICB the moment their income exceeds £50,000, but a couple who have won, say, £40,000 each, would escape despite winning a total of £80,000.
The tax doesn’t even make sense.
HICB is also complicated. Someone earning more than £50,000 but less than £60,000 will claim child benefit in the normal way and then complete a self-assessment tax return to remit some of the money to HM Revenue & Customs.
READ MORE: Child benefits: Parents left perplexed after receiving small advance payment
It is hardly surprising that some simply do not bother to claim child benefits, which increases the burden of raising children.
Even those not concerned must be shocked at the principle of imposing an effective tax rate of 65%. It would be disastrous if it were applied elsewhere.
There are growing calls for an overhaul, with financial advisers director Quilter calling the accusation “perverse” and saying it needs to be addressed.
High incomes are far from being the only victims.
Pensions expert Ian Browne said with the 40 per cent tax payment threshold being slightly higher than the HICB at £50,270, many basic rate taxpayers are getting caught.
He called on the government to increase the HICB charge in line with the higher rate income tax threshold. “It is perverse that base rate taxpayers are being trapped by a charge that is not designed for them.”
Incredibly, a couple with three children where one partner earns £54,000 will pay 65% tax on earnings over £50,000. This is perhaps the most punitive tax rate in the UK.
DO NOT MISS :
Sadio Mane shows he’s a class act after Liverpool’s loss to Real Madrid [REVEAL]
Jubilee row explodes as Harry and Meghan said they were ‘NOT welcome’ [LATEST]
‘Has a duty to herself’ Angela Levin in new attack on Meghan [ANALYSIS]
Chancellor Rishi Sunak imposes punitive tax levels
First, the HICB would cost them £1,054 in lost Child Benefit. Then they would pay 20% income tax on the first £270 they earn above £50,000, which adds £54. Paying 40% tax on income remaining at £54,000 adds another £1,492.
In total, they will lose £2,600 of their £4,000 in winnings, almost two-thirds.
There is a trick of the trade, however.
Browne said workers could potentially avoid the HICB charge by paying additional pension contributions, which lowers their taxable wages. “They will both increase the amount of child benefit they receive and get tax relief on their pension contributions.”
Jenny Holt, managing director, client savings and investments at Standard Life, suggests using the government’s child benefit tax calculator to see if you are affected.
Holt said if you choose not to collect Child Benefit, you should always consider completing the Child Benefit Application Form. “It helps you get National Insurance credits, which will go towards your state pension later in life.”