Child benefit changes: have you lost out?

7 January was the day thousands of middle-income families across the UK had been dreading. Because from then all households where one parent has an income of more than £60,000 would no longer be entitled to child benefit, while those earning between £50,000 and £60,000 would see their entitlement reduce.

Previously, the universal benefit was paid at a rate of £20.30 a week for the first child, with each additional sibling getting £13.40 a week.

But with the changes now in effect, higher earning families with two children could stand to lose up to £1,752 a year, while families with three kids stand will lose close to £2,500.

According to HM Revenue & Customs (HMRC), some 1.2 million families will be affected, 70% of whom will lose all their benefit.

But, confusingly, while these families have been told they're losing their benefit, the monthly payment will continue as normal. Rather than simply taking away the money, the government has opted to reclaim it through self-assessment. This means all affected families will have to declare their benefit on an annual tax return and pay an additional tax charge. 

Have you been affected?

According to HMRC, an additional 500,000 will now have to complete an annual tax return. For those earning £60,000 plus, the charge will wipe out the child benefit while those earning between £50,000 and £60,000 will see a proportional reduction, as Matthew Stephens, tax expert at Prudential explains.

"They will lose 1% of child benefit for every £100 of pre-tax income earned over £50,000."

HMRC has confirmed that parents will have a choice whether to pay back the child benefit either as a lump sum or have it collected monthly through their PAYE tax code.

If you opt for the latter your code will be updated from April and the charge for the period of 7 January to 5 April 2013 would be collected during 2013.

What do you need to do?

By now all affected families should have received guidance. If you haven't heard anything check out HMRC's website for up to date info.

"HMRC will be writing to everyone earning £50,000 or more to say they could be facing a possible tax charge," says Tina Riches, technical director at the Chartered Institute of Taxation.

The first step is to work out if you are affected and, if so, establish by how much.

The good news at least is HMRC will base its calculations on your ‘net-adjusted income', which could be lower than you think.

Your net-adjusted income is your income (including your salary, work perks like company cars, share dividends, rental income and so on) but less deductions such as pension contributions, gift aid, union subs and childcare vouchers.

So somebody who is earning £60,000 on the nose may be surprised to hear that they might be able to keep some of their benefit, while someone earning just over £50,000 could get to keep it all. This information can be found on your P60 and your P11D, which should be given to you each year by your employer.

If your net-adjusted income is between £50,000 and £60,000 you'll lose a proportional part of your benefit.

Tina Riches explains how to do the maths. "Take your earnings figure, deduct £50,000 and divide that by 100 to work out the percentage of your benefit you'll lose." So if you earn £52,000 you'll lose 20% of it, 50% if you earn £55,000, 80% if you earn £58,000 and so on.

While the wealthiest of families will be able to absorb the loss, thousands of households who earn just above the cut-off will really feel the pinch, particularly those in the South East where housing and childcare is so expensive.

Thankfully, as HMRC will be basing its calculations on your net-adjusted income, there are ways to legally reduce it in such a way that you not only get to keep some – or all – of your child benefit but also give your overall finances a boost.

Can you beat the hike?

One of the simplest ways to reduce your income is to increase your pension contributions. "Take somebody with three kids earning £60,000, and claiming roughly £2,500 in child benefit," says Matthew Stephens. "If they pay £10,000 into their pension they reduce their income to £50,000, so they don't have to pay the child benefit tax charge."

However, thanks to tax relief, investing £10,000 in your pension only costs higher-rate taxpayers £6,000. "You pay in £8,000 and get it topped up by £2,000 in tax relief straightaway and can then claim a further £2,000 back through your tax return," he explains.

Upping your pension contributions may be painful in the short term but it does at least mean the income you miss every month goes into your retirement savings rather than government coffers. "In this case, it will cost £3,500 [£6,000 minus £2,500]. So you end up with £3,500 less in the bank but £10,000 in your pension in return.

"If you did nothing with that £10,000 you'd have £3,500 in the bank after tax and child benefit charges but nothing extra in your pension," Stephens explains.

If you don't already use childcare vouchers this could be another clever way of getting your income down and clawing back your child benefit. Currently, higher-rate taxpayers can sacrifice £124 a month or £1,488 a year to buy childcare vouchers free of tax and NI.

Lucy Payne, quality and development manager at Kiddivouchers, says that a father with three children earning £60,000 a year could reduce his income by £1,488 by buying his maximum quota of childcare vouchers. "With a salary of £58,512 he could expect to keep £364.44 of his child benefit award and also benefit from tax and NI savings of £624.96 a year from his childcare vouchers," she explains.

Payne adds that childcare vouchers aren't just for parents of young children. "A considerable number of parents don't think vouchers apply to them, that they are just for pre-school children or low earners. You can use them to pay for nurseries and pre-schools but also after-school and holiday clubs. Even wrap around care at private schools and school trips."

You may or may not be able to reduce the impact of January's changes – that will depend on your earnings, the number of children you have and the amount you already spend on childcare vouchers and pension contributions.

But even if you can't beat the new tax charge, the message is don't bury your head in the sand: read the guidance from HMRC, work out how much you'll lose, budget and put that money aside. Otherwise you could be stung with the mother of all tax bills.


  • Read guidance from HMRC - you should have received a letter by now. Contact your tax office if you haven't.
  • Don't spend child benefit you'll have to repay. Protect yourself from a hefty tax bill by calculating how much you'll owe and setting up a standing order to move that money into a savings account each month. Pick a high interest regular saver so you at least get to spend the interest.
  • See if you can beat the tax hike by exploring ways to reduce your income - such as increasing pension contributions or buying childcare vouchers.
  • Even if you stand to lose all your child benefit don't stop claiming. You never know when your circumstances could change. Paying it back could be a whole lot easier than getting payments re-started if you lose your job.


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Your Comments

I agree that "Thousands of households who earn just above the cut-off will really feel the pinch" but this means that the suggestion of "One of the simplest ways to reduce your income is to increase your pension contributions" is simply impractical.
The system is farcical and discriminates against those families where one parent works full time. A family earning £60k may effectively not receive any child benefit (no childcare vouchers as one parent is at home and no spare cash for additional pension contributions) whilst a family earning £100k combined could potentially receive the full childcare benefit.
Ludicrous and inequitable!

This becomes law on 7th Jan 2013.  If you earn over £60k, can't reduce it by pension contributions etc and don't currently complete a tax return it maybe worth disclaiming the child benefit (which is revokable and you can go back 2 years in the past retrospectively if you do disclaim), you can do this in advance online but state you want it to come into effect from 7th Jan 2013 so you still get the remainder of this year.
Disclaimer election has to be made by the person entitled to receive the child benefit.
Maybe easier than completing a tax return if you don't currently.

I've been brought up with my parents urging me to save for something which I want.  The only exclusion was a mortgage.  Children are no different.  If people want children, I don't see why they shouldn't save to have them.
Child Benefit was originally introduced shortly after the Second World War, in August 1946.  After World War I, many countries were left with dwindling populations and Child Benefit (originally called "family allowance") was introduced to encourage families to bear more children and increase the birthrate.
The problem?  We no longer have a dwindling population and I can't see any incentive for anybody to receive a tax-free payment for simply having children.  If families want children, I really feel that they should save up and not expect a handout at the taxpayer's expense.

Dear Malony,
As I understand it you are sadly mistaken.
In fact a couple, each earning £100,000, could each place £50,000 in pensions and as a family qualify for full credit. They could in fact of course, earn slightly more and claim childcare vouchers on top. Whilst another couple, one of whom stays home to look after the kids, and the other earning £60,000 get nothing!
The stay at home parent would no doubt be asked to give of their time freely to assist at school, and PAY for the privilege of going on school trips to ensure there is sufficient adult supervision..., to look after all the working parents kids.
Still look on the bright side..., no sorry, I can't see one either! 

Incidentally, the above couple on a joint income of £200,000 paying into pensions enabling them to claim benefits have a household income of £80,232 after income tax.
The single £60,000 earner with no benefits has a post income tax household income of £42,475.

My point was that in a family with one person working who earns £60,000 no child benefit may be earned (assuming no pension contributions etc). However, in a family with both parents working who each earn £50,000 and therefore £100,000 in total the full child benefit would be rceivable. It is this inequality which is absurd!