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.
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.
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.
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