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Child benefit cut: full Q&A on how it works

Chancellor George Osborne has partly reversed a planned cut in child benefit, meaning more families will be entitled to help than was originally proposed, though anomalies still exist and confusion still reigns.

The result is 1.2 million families will either lose their child benefit or get a reduced payout, according to HM Revenue & Customs (HMRC), though under the original plans 1.6 million would have lost all their entitlement.

What's more, 500,000 parents will face the bureaucratic nightmare of having to fill out a self-assessment tax form each year to continue receiving the benefit. Many more will also be asked to pay a portion of their payout back.

After we were flooded with emails, tweets and Facebook messages from confused parents, our Q&A below explains what the overhaul means for you.

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Q. When does this all start?

The changes happen from January 2013 so there is no immediate threat to payments.

Q. Who exactly is going to lose the child benefit?

Under the previous plans, parents earning more than £42,475 a year each – the 40% tax rate threshold – were set to lose their payments from January 2013.

The new plans allow a family to get the full allowance as long as neither parent earns more than £50,000 a year.

And here's the crux: combined or household income is irrelevant. If just one parent earns over £50,000 a year, they get less.

Households where at least one parent earns between £50,000 and £60,000 a year will effectively get a partial payout.

Over £60,000, they'll effectively get no child benefit.

Q. How will HMRC take child benefit away, will I just stop receiving it?

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No. Everyone will still be eligible but what happens next is complex.

Families where one parent earns over £50,000 still get the full benefit but will pay more tax to effectively reduce or cancel out the gain.

They will have to declare this on a self-assessment tax form.

HMRC estimates that of the 1.2 million of families affected, 500,000 will have to fill out a self-assessment form who currently don't have to.

Q. What if I earn over £50,000 but my partner nothing?

Sadly, the result creates an anomaly whereby a family can earn £100,000 a year between them (£50,000 each) and get the full benefit.

But if one parent earns £60,001 and the other doesn't work, they'll effectively get no child benefit.

It's all about if one parent hits the threshold. Household income is irrelevant.

Q. How much child benefit do I get?

The weekly amounts, fixed for at least the next two years, are:

  • £20.30 (£1,056 a year) for the oldest or only child.
  • £13.40 (£697) for each additional child.
  • £14.75 (£767) as a per child guardian's allowance.

Q. What if I earn between £50,000 and £60,000? What exactly happens?

If at least one parent in your family earns in that bracket they will still get the full child benefit.

However, they will pay extra income tax to reduce the gain.

This will be charged at 1% of the total child benefit per extra £100 they earn over £50,000 a year.

This will be based on the salary of the highest earner of the two.

The table below highlights how much child benefit a family with two kids will get, after tax.

Child benefit from Jan 2013
Highest earner salary Annual child benefit after tax
£40,000 £1,752
£50,000 £1,752
£55,000 £876
£60,000 £0
Based on family with two kids

Q. What counts as income?

This includes everything you'd normally have to declare for tax purposes, and is based on actual income, not estimated income.

This includes, but is not limited to:

  • Your salary
  • Any second job
  • Savings interest
  • Rental income

Q. For what period do I have to declare income?

The income that counts is what you earn in the tax year for which you claim child benefit.

Q. What if income is irregular?

What is important is not when in the year you earn money but how much you earn per financial year. So only the total matters.

Q. What if I earn over £50,000? Which parent is taxed extra?

If both earn over £50,000, the partner with the highest income will be liable to the charge. If just one earns over £50,000 they will have to pay the extra tax.

Q. What if I earn over £50,000? When do I pay this extra tax?

The new regime is an 'earn now, pay later' system. If you collect child benefit in the 2012/13 tax year when the change happens, you must declare your 2012/13 income by 31 January 2014, at which point the tax will be due.

HMRC says those in the PAYE system may have the option to pay the tax as part of their standard pay packet tax deduction, but this detail has yet to be confirmed.

Q. So if I earn over £50,000, what do I do?

For taxpayers in the PAYE system, you will have to fill out a self assessment form for the period in which you've claimed child benefit.

HMRC will write to you in the autumn to explain exactly what you need to do next.

If you already fill out a self assessment form, you will need to include the information relating to child benefit in your tax returns for 2012/13 and beyond, and will be charged as part of your overall tax bill.

Q. What if I earn over £60,000? What are my options?

You can choose not to take child benefit to avoid the complication of additional tax.

But you can also choose to take it, though the extra tax will wipe out the entire payout.

HMRC stresses it is still important to complete claims for any new children, even if parents don't actually get any child benefit.

For each week you are entitled to the cash, you could qualify for National Insurance credits which can help to protect future entitlement to the state pension.

Q. What counts as 'living together' to determine income?

HMRC includes any two adults who live together, whether they are married or not.

Q. How will HMRC monitor if people live together?

This information is unclear at present.

Q. What if I am separated from the other parent? Does a step-parent's income count?

As only one parent can claim child benefit, HMRC will assess all earners within the household within which the benefit is claimed.

If that household includes a step-parent or someone who is not the child's parent, their income still counts.

Q. What if the child is in custody at two places?

Again, HMRC will assess all earners within the household within which the benefit is claimed.

Separated parents may decide to change who claims child benefit to side-step the tax.

Our view

Martin Lewis, MoneySavingExpert.com creator, says: "This is a ridiculously complicated system and is likely to end up causing confusion.

"Not only is there the anomaly that some families earning £100,000 with split income get it, while others with just one earner lose it at £60,000.

"The fact it's clawed back at the end of the year could lead to a child benefit overpayment issue – where people spend the cash but then have to pay it back.

"Add to that the fact that we now have a 'who lives with who' issue, and I think the Chancellor has added a cumbersome new regime that may creak on implementation."

Update, 30 Oct 2012: We have published an updated Child Benefit Q&A now the Govt is informing claimants in writing.

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