How will child benefit changes affect you? If you live with a higher rate taxpayer and get child benefit what happens if you don't tell the government? We have the answers.

Questions and answers on child benefit changes

Q. Currently, who gets it, how is it calculated and how much is it?

Anyone with a child under 16 or aged 16-19 if they are in relevant education or training, can claim child benefit (though only one parent or guardian can claim). You get £20.30 a week for your eldest child and £13.40 a week for each of your other children. This payment is tax-free. It is normally paid every four weeks but can be paid weekly in some circumstances. Normally child benefit is paid to the mother.

Q. What changes is the government proposing to make to child benefit?

Currently child benefit is not means tested or taxed: it is a 'universal benefit'. Any parent or guardian of a child can claim, regardless of their income. The government is proposing that, from January 2013, child benefit will be withdrawn from households with a higher rate taxpayer (the threshold is currently earnings of £43,875 a year though this is set to drop to around £42,000).

Q. Will families still get child benefit?

Yes, apparently. The government has said that HM Revenue and Customs (HMRC) will implement this policy through the tax system (the PAYE system for most people, self-assessment tax returns for those with more complicated tax affairs). In other words, child benefit would continue being paid but it would be clawed back from higher rate taxpayers either by being deducted from monthly pay packets or through a bill at the end of the tax year.

Q. How will the government know who is in a household with a higher rate tax payer?

The government can either try to work this out itself or rely on the taxpayer declaring it. For the government to work it out for itself it will need to link up child benefit records and tax records in a way that can't currently be done.

This would be even more complex than it sounds as it would need to cover households where the higher rate taxpayer is not the person claiming child benefit – which, more often than not, would be the case .

The alternative is to rely on taxpayers to tell the government they are higher rate earners. The government has said that people will be able to either contact HMRC to stop receiving child benefit or have it recovered through the PAYE or self-assessment system.

Tax returns are in any event usually not completed until months after the end of the tax year, which would mean a big retrospective payment (more than £1,000 even if you only have one child) to the government. Alternatively, the tax could be clawed back by adjusting the amount of tax deducted from each monthly wage through the year via the tax code. Either way there is quite a time lag and a potentially nasty surprise in the tax envelope.

Perhaps the coding notice system will be used to request information and tell people. Another possibility would be requiring recipients of child benefit to reapply for it annually and tick a box stating they are not in a household containing a higher rate taxpayer. The government has not so far suggested it's considering this.

Q. Can the government easily police this?

Apparently not. The Government have said firmly that it will be the responsibility of the higher rate taxpayer to tell them they are in a household receiving child benefit.

Q. Does the person receiving child benefit have to tell the government if they are in a relationship with a higher rate taxpayer?

Not as things stand. It will be dependent on taxpayers telling it if they are in the higher rate, under threat of a fine. It could be more easily policed if the computer systems administering child benefit and income taxes were integrated, but there are compatibility issues which will make this very difficult.

Q. What penalties could they face if they don't? What about their partner?

The Treasury has said there would be 'penalties' in line with other cases of non-disclosure of information relevant to a person's tax affairs. This would presumably be fines, but it's not said how much those would be. If they are different people, the penalty would be paid by the higher rate taxpayer, not the child benefit claimant.

It remains to be seen if there would be the same latitude in applying these penalties as there is elsewhere in the tax system – eg reasonable excuse defence, no penalty where innocent error despite taking reasonable care.

Q. How is it possible to avoid losing child benefit?

Only by reducing your earnings to below the higher rate threshold. This is only likely to be worth considering if the taxpayer is just above the threshold. In these circumstances they might consider increasing payments into their pension fund, or another form of salary sacrifice. But the Government will be wise to anything which looks like an avoidance scheme. Some couples might decide to adjust their working hours between them, both working part-time, rather than one person working full-time.

The first statements suggested that the withdrawal of child benefit will be a ‘cliff edge’ cut off at the point a taxpayer goes into the higher rate. So going into higher rate just by a pound would mean the loss of their whole child benefit. Presumably when the details of the proposal are thrashed out there will be some form of tapering.

Source: Chartered Institute of Taxation