HMRC to scrap child benefit 'loans'
Although originally introduced as a universal benefit, child benefit became (partially) means-tested in 2012, being restricted for those families where one person earns £50,000 and scrapped completely if one partner earns £60,000 or more. However, to protect stay-at-home parents whose only income might be the child benefit payments, those ceasing to be entitled to the benefit could deal with it in two ways- disclaim it, or repay the excess amount claimed (which could be all of it) through the self-assessment system on a tax return.
However, because of the way the self-assessment system works, this meant that these high-earning parents were actually able to take advantage of an interest-free ‘loan’ from the taxman, by receiving payment of child benefit well in advance of the date of repayment. For example, child benefit paid between April 2012 and April 2013 would be due for repayment on the self-assessment deadline of 31 January 2014. In some cases, the underpayment could be collected via a change to the tax code in the following year, giving an even longer extension on the loan. In either case, the ‘loan’ from HMRC, which, for a family with two children amounts to over £1,700, could be interest free for over two years. Which is a great deal if you can get it.
But, it seems that someone at HM Revenue & Custom has realised this unforeseen benefit and they are now taking steps to address the issue. HMRC is now identifying affected parents and is making the relevant adjustments in the current year tax codes- which will take effect from this month- in order to claw back the child benefit that is not due at the same time as it is being paid out.
Normally, tax codes are used to collect underpaid or overpaid tax from a previous year, and allocates taxpayers with an personal allowance amount, less any deductions for things like overpaid child benefit. For example, a working age individual would normally have a standard tax code for 2015/16 of 1060L, which means that a payroll department will know that the first £10,600 of a person’s wages should be paid free of income tax. For those still receiving child benefit even though they are not entitled, from this year onwards this code will be changed, assuming there are no other issues or deductions, to something close to 700L, so affected taxpayers will pay slightly more tax each month, at approximately the same pace as they receive their four-weekly child benefit payments.
Unfortunately it appears HMRC has not explained why they are changing codes, which could cause even more congestion on their phone lines, already filled with pension freedom day pensioners querying potential tax implications of withdrawals, from confused high-earning parents. Besides, given HMRC’s track record with spontaneously adjusting tax codes (or not), let’s hope they manage it a little better this time around.