The Daily Telegraph - Saturday - Money
Child benefit charge is a ‘tax on romance’ in need of a rewrite
Moving in with your new partner could leave you thousands of pounds worse off, discovers Harry Brennan
Romantic partners are increasingly at risk of lumping themselves with unexpected tax charges when moving in together, as cohabiting unmarried couples are now the fastestgrowing family type.
More than seven million families claim child benefit, which has been available since the Seventies. However, because of the introduction of the “high income child benefit charge” in 2013, around one in 10 is forced either to opt out of receiving the benefit or pay back some or all of the benefit received – up to £2,500 a year for a family with three children.
This month the independent Office for Tax Simplification (OTS) called on the Government to review child benefit and the charge, which experts have dubbed “a tax on romance”.
The charge kicks in when a parent in receipt of child benefit – or their partner – earns more than £50,000. There is a sliding scale until one partner earns more than £60,000, at which point the entirety of the child benefit that has been paid out has to be returned to the Government.
Perversely, if both partners earn below the threshold, the charge does not apply. This means a couple with a combined income of £100,000 can still receive child benefit without charge, while another couple where only one partner works, earning £60,000, will be forced to pay in full. It falls on the higher-paid partner to claim and repay child benefit.
The rules apply to spouses, civil partners and cohabiting couples.
Sean McCann, of insurer NFU Mutual, said unmarried couples who chose to move in together for the first time were particularly at risk of being caught out, as the definitions of “partner” are broad.
The number of unmarried couples living together with young children has increased by almost a quarter over the past decade to 1.3 million in 2018, according to the Office for National Statistics.
The thresholds for paying back child benefit have not changed since they were first introduced, meaning more people are likely to be hit by the charge as wages and inflation increase.
“This little-known quirk is probably the e last thing on anyone’s mind when they move in with a new partner,” Mr McCann said.
“New partners are far less likely to talk about what they earn than a married couple, let alone their tax affairs, and could easily be unaware that they have to pay the charge at all.
“If you have a higher income than your partner and it exceeds the threshold, the onus is on you to tell HM Revenue & Customs and pay the tax bill, even if you are unmarried and the children are not your own. For some people, this runs into thousands of pounds.”
Mr McCann called it “a tax on romance”. Previously, HMRC was forced to refund a total of £1.8m to thousands of taxpayers after slapping them with penalties for failing to notify the taxman of their need to pay the charge after forming new relationships. All were found to have had a reasonable excuse, as they had never been directly informed of the onerous rules.
The tax authority now checks its information every year on who needs
to pay and writes to families explaining how they can avoid the charge. In 2017-18, more than half a million families opted out of receiving child benefit altogether.
But opting out is not always the best way of getting around the tax, as it means parents will lose entitlements to National Insurance (NI) credits that can boost their state pension. Stay-athome parents qualify for these credits until their child reaches the age of 12.
One option allows families to claim child benefit but decline to receive any income, meaning they dodge the charge but keep the NI benefits.
Another option, Mr McCann said, was for parents in receipt of child benefit to avoid the high income tax charge by siphoning off some of their salary into their pensions to reduce their net incomes, as contributions attract tax relief at your marginal income tax rate. For instance, the breadwinner of a family of three with a £60,000 annual income could save £4,500 a year by putting £8,000 into their pension pot. Savings and tax reliefs would bring earnings into the basic-rate tax band, meaning the charge would not apply.
The OTS called on the Government to review how the system works and clarify the consequences of claiming the benefit or opting out to avoid people needlessly losing out.