Over a million families will soon be told they could lose their child benefit entitlement next year, or have it reduced.

HM Revenue and Customs (HMRC) is writing to households where at least one parent earns over £50,000 a year and currently gets child benefit to explain how the welfare shake-up affects them.

Letters will start to arrive from the end of this week, but they may take up to two weeks to arrive.

The letters will not actually state your new entitlement, as this depends on your income for the whole tax year, which runs from April to April.

Below, we explain what the changes, first announced in March, mean for you. If it means your entitlement will drop, it's vital you budget accordingly.

Q. What's happening with child benefit?

About one million families will either lose their child benefit or get a reduced payout, according to HMRC.

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.

Q. Who exactly is going to lose child benefit?

Families will still get the full allowance as long as neither parent earns more than £50,000 a year.

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 each year will effectively get a partial payout.

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

Q. When does this all start?

The changes happen from 7 January.

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

No. To confuse matters, everyone will still be eligible but what happens next is complex.

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

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

Of the one million families affected, HMRC estimates 500,000 will have to start filling out self-assessment forms.

Q. How much child benefit do I get?

If eligible, the weekly amounts, fixed until April 2014, are:

  • £20.30 (£1,056 a year) for the oldest or only child.
  • £13.40 (£697) for each additional child.
  • £15.55 (£808) as a per child guardian's allowance.

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

There's an anomaly where 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 a year and the other doesn't work, they'll effectively get no child benefit.

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

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

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

However, they'll 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 January 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 a family with two children.

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 protect your future entitlement to the state pension.

Q. Should you claim child benefit if you earn over £60,000?

If you earn over £60,000 a year, you can choose to take child benefit and pay it back or simply de-register.

Martin Lewis, MoneySavingExpert.com creator, says: "From a purely financial perspective, it makes sense to claim the child benefit even if you are over the £60,000 limit – however, be careful not to spend it as they will want it all back.

"You can put it in the highest interest cash Isa or savings account that you can find, so at least you're earning interest, then pay it back on time. Assuming the rules don't change, you could get £500-£1,000 in interest for a new-born, by the time they're an adult.

"Of course, if you're not financially disciplined and may spend it, this could cause a problem, in which case it may be worth saving yourself the hassle and just cancel it if you're not due it."

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

For taxpayers in the PAYE system, where tax is deducted by an employer, you will have to fill out a self-assessment form for the period in which you've claimed child benefit. For the current tax year, this must be done by 31 January 2014.

If you already fill out a self-assessment form, you'll 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.

If you don't already fill one out, you need to register for self assessment by completing an SA1 form before 6 October 2013.

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 also have the option to pay the tax via their pay packet, which means slightly less take-home pay.

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

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

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 sidestep the tax.

Q. What if my child's not yet born?

If you've yet to register for child benefit, whether your kid was only recently born or is yet to be born, you can choose whether to register or not. If you do, you're in the same boat as everyone else.