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Paul Lewis: HMRC has made a mess of state pension credits

Thousands have been incorrectly fined, with many also missing out on vital state pension credits

In a rare admission of incompetence, HM Revenue & Customs is to waive penalty charges for tens of thousands of parents who received child benefit even though their income was too high.

They will still have to pay the back taxes, as well as interest, but they will not be fined in addition – a penalty which can amount to more than £1,000 itself. Those who have already paid penalties for 2013/14, 2014/15 and 2015/16 will have the money refunded. And those who get their self-assessment forms in by 31 January will be able to pay the tax for 2016/17 and 2017/18 without being charged a penalty.

Paul Lewis: The end of advice as most know it

The concession comes after HMRC tacitly admitted it had failed to communicate the complex rules about child benefit and high incomes. Its admission was sparked by the revelation it had written to 40,000 people warning them to pay the tax relating to 2016/17 and a further 60,000 for 2017/18.

To understand why these people missed their obligations, let me unpack the first sentence of this column, much of which is approximate. The people who pay this tax – officially called the high income child benefit charge – are not necessarily the recipients of the child benefit and may not be the parents of the children it is paid for.

If one partner has an income over £50,000 and they or their partner receive child benefit, the one with the higher income is obliged to register the fact with HMRC and complete a self-assessment form to pay the tax. If the higher earner in a couple has an income above £60,000 then they must pay tax equal to all the child benefit received by them or their partner. If there are three children, that is £2,501 a year, and £1,071 even with just one child.

If income is between £50,000 and £60,000, the charge is equal to part of the child benefit. Half of it at £55,000, 20 per cent of it at £52,000 and so on. That can lead to very high marginal rates of tax if the individual gets a pay rise. With two children, total income tax, National Insurance and HICBC is 60 per cent. With seven children, it is 104 per cent, leaving that individual worse off than they were before the pay rise.

Gordon Andrews: Planning points for new parents

The higher earner always pays the charge, even if their partner is the one who gets the child benefit. It is their income that is counted.

So in a household where one partner earns £60,000, they pay the charge even if the other partner has no income at all. But where a couple has an income of £100,000 divided equally between them, no charge is due (because of rounding rules, the charge actually begins on incomes of £50,100 or above).

The income that counts – net adjusted income – is income minus pension contributions, gift aid payments and childcare vouchers.

However, income is enhanced by benefits in kind such as a company car. Someone earning well under £50,000 but with a company car can still have to pay the charge.

The partner who pays the charge need not even be a parent of the children the child benefit is for. A person with an income over £60,000 who moves in with a single parent with three children still has to pay the charge equal to £2,501 for the time they live there. The absent biological parent will not pay the charge.

If your head is spinning, that is because the rules are not just complex but clearly daft. And it is no surprise those tens of thousands caught by them were unaware of the facts. To avoid all these complexities, more than half a million parents have given up their child benefit, double the number who get it and pay the charge. An unknown number of others have just not claimed it in the first place. Crucially, however, a parent who gets child benefit for a child aged under 12 automatically gets an NI credit which counts towards qualifying for the state pension. If child benefit is never claimed, credits will not be given.

Although HMRC will be refunding some penalties, it still believes many high-income people should have known about the charge. It has drawn up strict rules for having a “reasonable excuse” to get the penalties waived.

Paul Lewis: Time to end this dangerous commission in disguise

The rules are not published in detail but HMRC has confirmed that a person fulfilling all four of the following conditions will have penalties waived and should be refunded within six months:

  • Claimed child benefit before the high income charge began on 7 January 2013;
  • They and their partner’s incomes were both below £50,000 in 2012/13, but at least one exceeded it in 2013/14 or later;
  • Neither partner has claimed child benefit for any child since the high income charge began on 7 January 2013;
  • Neither partner had been sent a letter from HMRC about the high income charge before they decided to pay it.

Anyone who believes they fulfil the criteria for a refund but hears nothing by June 2019 can contact HMRC and ask for one. It may be difficult to get. This climbdown may prove useful in future for people who have made a tax error if their ignorance of HMRC rules was reasonable.

Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s Money Box programme. You can follow him on Twitter @paullewismoney

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. This is a great area for financial planning, for as you say in your article the income is net of pension contributions, so for example if someone earning £60,000 with 3 children pays £10,000 into a pension, they affectively get £4000 tax relief, plus £2500 child benefit relief meaning it only costs them £3,500 to get £10,000 into their pension. Who doesn’t want that?

  2. @ Paul Lewis – You think that’s bad…. this is what one of my friends has had to send to his MP.

    Please represent me in the appalling way I have been treated by The Department of Work and Pensions (DWP)in particular The Pensions Service(TPS).
    Since 2012 when I became eligible for my State Pension(SP) I elected to defer it because I was still usefully employed and I could foresee no reason to even think about retiring . I am fit and healthy and I make a worthwhile contribution to the training and education of XXXXX of which there is a shortage in this country.
    Every year or two since 2012 I have contacted The Pension Service(TPS) to inform them of my continuing deferment and requesting an update as to my eventual payment using that current date as an example. I have been given the correct information and never advised of any reason why I should not get the full payment when I opt to take my pension
    This year I informed TPS in the middle of August that I would be claiming my SP as from my birthday in 2018. That would be a deferred payment of 6 years and I was informed the approximate amount would be in excess of £40,000 as well as my pension payments. I was not informed at anytime over the past 6 years when communicating with TPS that there was any reason why I would not be receiving my rightful payment having qualified correctly and I might add I have never claimed any benefits.
    I eventually received my Options letter on Tuesday on how I would like to receive my deferred payment. It took prompting twice to eventually receive this after waiting since the middle of August.
    I was shocked to see that my one – off lump sum payment was to be £20,000.
    Half of what I was informed in August I would receive.
    I made numerous telephone calls to TPS on Wednesday and Thursday navigating the circuitous routes I was sent on to eventually reach the right department , the deferral centre.
    During the calls I was informed of the following information
    • My pension deferral was cancelled in 2015—– I was not informed and as previously stated in my communications with TPS it was never mentioned
    • My wife was in receipt of Employment and Support Allowance(ESA) from 2015—
    • She was not informed that it was means tested or that I was responsible for her AND that my Deferred Pension could be cancelled at that point of claiming and it would be non-recoverable if I continued deferment
    • I was not informed by any department that my Deferred Pension would be stopped if my wife received this benefit nor that it would be non-recoverable if I continued deferment and did not claim it
    • During the calls I was informed it was my responsibility to check on the Gov websites for my continuing entitlement to my deferred pension and not TPS or DWP. They stated on all occasions that the departments did not have a responsibility to inform me even though it was a stoppage of my rightful pension.
    • I am appalled at this callous , thoughtless and irresponsible attitude is the normal operating procedure for what are supposed to be a caring departments dealing with my lifetime’s earnt pension and not privilege.
    Should you require any further information please call me soonest
    Finally the amount of deferred pension stopped in no way equates to the ESA my wife has been claiming

    Kind regards

    For the record, had the DWP told my friend that his wife had been claiming ESA, then I suspect they would have been in breach of the DPA. Had they done so however, he probably would have suggested to her NOT to claim ESA and he would have made more funds available to her PERSONAL account rather than their joint account.

    We are increasingly seeing two sets of rules and laws which are in direct conflict to one another. A married couple unlike a Ltd company are not a separate legal entity, but Govt rules increasingly disadvantage those who legally enter a marriage contract over those who don’t.

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