Harts CHARTERED ACCOUNTANTS

Spring Budget: Child Benefit Changes

Posted: 15th Apr
Harts Accountants - Child Benefit Changes

Do you have children? Do you or your significant other have taxable income over £500,000? Or if not, would you like your income to be in excess of £50,000. If the answer to the first and either the second or the third questions is “yes”, then you need to be aware of changes to child benefit entitlement from this April.

A change for the better?

For many years, a tax charge has been imposed on child benefit received where either half of a couple has an income in excess of £50,000. And the tax charge would be equal to the child benefit if income is in excess of £60,000. This meant a household with two earners each on £50,000 (household income £100,000) received full child benefit, whereas another household with one earner and household income of £60,000 received no child benefit.

In addition, because of the rate at which child benefit is taxed, families with the higher earner having an income of between £50,000 and £60,000 faced a high effective tax rate. The rate was nearly 65% for those with two children and close to 75% for those with three children. If the individual was still playing off a student loan, an increasingly common situation, the effective tax rates were higher still. And with recent inflation, an income of £50,000 is not particularly high these days.

Changes for families

In the March Budget, the government recognised some of the unfairness in the regime and that it was increasingly driving what might otherwise be considered perverse behaviours such as the higher earner in a household reducing their hours to keep earnings below £50,000. Is it worth working on Fridays if the government takes three quarters of it in tax? Three changes were made, all effective from April 2024:

  • The threshold at which child benefit starts to be taxed is increased from £50,000 to £60,000
  • The threshold at the tax charge is equal to the benefit received is
  • increased from £60,000 to £80,000
  • The rate at which the benefit is taxed is halved, so reducing some of those extremely high effective tax rates

The government’s stated hope is that the changes will mean that more middle earners conclude it is worth their while increasing working hours (and paying taxes) rather than actively reducing hours to keep
their child benefit entitlement.

Changes for business owners

For business owners, and indeed employees, with children, these changes need to be considered:

  • If you have restricted drawings and so taxable income to £50,000 historically, there is now an opportunity to take out a further £10,000 a year, potentially each, while keeping full entitlement to child benefit. Any income over £50,270 will still be subject to higher rate tax though.
  • If you are not currently claiming child benefit, it would be advisable to review whether a claim should be made or restarted in the light of the new thresholds.
  • If child benefit is not currently being received it is important to review swiftly as claims can only be backdated three months.
  • It should be noted that claiming child benefit, even if it is repaid through the tax system, also provides national insurance credits (ie state pension entitlement) for those with children under 12. And that making a claim (at any point) is also the mechanism through which your son or daughter will receive a national insurance number when they turn 16.

And finally

The government has also proposed that from April 2026 the child benefit tax charge should be based on household rather than the higher earner’s income. Doing so would make the system much more equitable. However it remains to see whether this or the next government will be able to achieve this proposal as it will be very complicated given that the UK’s tax system is based wholly on individuals.

In the meantime, we would recommend those with children review whether they should be claiming child benefit, and indeed whether the increased threshold provide scope for a welcome increase in drawings from the business. For those to whom it is relevant these changes will have a far bigger impact than the National Insurance cut which was the focus of media attention.

If you need any further help, please do get in touch.