More confused than ever about child benefit taxation after talking to HMRC!

waccamole

Not sure whether to post here or the benefits forum (or pensions forum) as this touches on all those areas. Anyway, here goes.

I've been following the developments re. child benefit taxation changes for higher earners with interest. I understood that those affected would receive correspondence from HMRC in 'the autumn' but having heard nothing yet I called HMRC today.

What I was told by the young man I spoke with is rather different to what I've read everywhere including on these boards. He explained this to me by saying that it's new to everyone, what's been written so far is a misunderstanding of how things will work and that they've just received a 'pack' about it themselves and what he's told me is definitely right - he checked with colleagues whilst I was on the phone as I questioned what he was telling me.

He said that even if the income of at least one partner exceeds £60K, child benefit will not be totally clawed back through taxation from the higher earner.

He said that the annual amount of child benefit will be added to PAYE income for tax purposes in the same way as car benefit.

So, if for example, child benefit amounts to £2000 per year total income for the year for tax purposes could be:

PAYE income £62000
car benefit £5000
child benefit £2000

Total £69000

Then take away any allowances and calculate tax as normal from there.

So, only 40% of the child benefit amount will be clawed back.

I had to cut my conversation with him short as I had to go to work (ironic) but although he initially agreed that Ajusted Net Income would be used he them said 'gross taxable pay from P60' would be used which isn't that same (is it?).

He said salary sacrifice wouldn't make any difference as it is 'income' not taxable income that matters.

But, he said if pension payments were made from net income then the contributions grossed up by 20% (to allow for the extra tax relief due to higher rate tax payers) needed to be deducted.

I am now thoroughly confused as this seems to be different to my understanding to date which was that all child benefit will be clawed back in tax if income exceeds £60K for one partner.

I'm just trying to work out what income I'll lose come January - why is it soooooo hard???

I plan to phone again, speak to someone else and see what they say! In the meantime any comments?

Cheers

Wacca

xylophone

http://www.hmrc.gov.uk/budget2012/cb-income-tax.htm#a4

waccamole

Exactly Xylophone.

What I was trying to clarify by phoning was what's taken into account when calculating 'adjusted net income' which is what I understood was the figure used to work out income for child benefit taxation purposes. I've seen the document 'Child Benefit: Income Tax Charges for Those on Higher Incomes' but it doesn't answer my specific questions.

I'm particularly interested as because of the amount of my earnings and how I am paid, how this is worked out could have a big impact. If I earned £20K or £100K it would be clear(ish).

Basically, I salary sacrifice quite a lot of my salary in exchange for benefits from my employer.

My P60 gross income exceeds £60K. But, my post salary sacrifice income (pension and other benefits, medical ins, childcare vouchers etc.) does not by quite some way. So, I'd like to know where I stand. Does some, none or all of this salary sacrifice affect my income for child benefit purposes. I can't get an answer anywhere.

If I'm going to (effectively) lose all of our child benefit then I need to make changes to my salary sacrifice choices so that more money is left in my monthly pay to make up for losing child benefit (I have 3 kids so it's over £2400 per year).

I really find it frustrating that HMRC can't give me a straight answer. A few weeks ago I was asked by them what I was worried about as it doesn't come into effect until January! What planet are these people on - it matters to me that I might lose £188 per four weeks, I need to know so I can make adjustments.

Sorry for having a bit of a rant!

zagfles

This explains it http://www.hmrc.gov.uk/budget2012/tiin-0620.pdf

What HMRC told you above is rubbish. You are not taxed on the amount of child benefit like a company car. You face a tax charge of 1% of the amount of child benefit you received for every £100 you earn above £50,000. This means you lose the whole lot if your "adjusted net income" is £60,000 or above.

Your post above is confusing. You say your "P60 gross income" is over £60,000 but your "post salary sacrifice" income is less? That can't be, if it's actually "salary sacrifice" then that will lower your P60 income. That's the whole point of salary sacrifice.

If you salary sacrifice for benefits which are taxable, then the taxable value of those benefits will be added to your income for tax (and the child ben charge) so the effect may be minimal if anything (you'll probably just save NI at 2%). The effect may be different for stuff like company cars since the taxable value bears little relation to the actual cost, so you could win or lose on this.

Salary sacrifice for stuff that's not taxable is the best way to go, eg pension, extra leave etc.

EvieSaver

xylophone wrote: »

http://www.hmrc.gov.uk/budget2012/cb-income-tax.htm#a4

I've copied this bit from the above link:
"If you have income of £70,000 and your partner receives Child Benefit for 2 children of £1752 for a whole year, the charge will be on £1,752 which is the full amount of the child benefit received."

Is the word "on" the important bit here? The charge will be ON £1752 rather than the charge will BE £1752. If this is correct, that there is a 40% tax ON the benefit received then this is also completely different to how I understood this.

I wonder when this will be made clear?

I'm confused too.

EvieSaver

...just confused little old me again.

How does the repayment of child benefit work through PAYE? I always thought that PAYE dealt with taxable benefits eg a company car - taxable benefit of £4000. This does not mean that £4000 is paid in tax but that a rate of tax is paid on this amount, the tax rate depends on earnings. So it could be that 2 people with the same car but with different earnings could pay a different amount of tax eg £4000 car benefit x 40% and the other £4000 car benefit x 20%. Is this correct?

If so then how will they know what the taxable amount is needed to repay the child benefit received? Just because someone earns in the 40% tax bracket one year does not mean they will the next year. For example if a person needs to repay child benefit of £800 this would require a PAYE tax code adjustment of 2000 for a 40% tax payer but a 4000 adjustment for a 20% tax payer. How will HMRC know what adjustment to make? Or have I just got myself even more confused now?

I think I've got my brain in knots.

zagfles

EvieSaver wrote: »

I've copied this bit from the above link:
"If you have income of £70,000 and your partner receives Child Benefit for 2 children of £1752 for a whole year, the charge will be on £1,752 which is the full amount of the child benefit received."

Is the word "on" the important bit here? The charge will be ON £1752 rather than the charge will BE £1752. If this is correct, that there is a 40% tax ON the benefit received then this is also completely different to how I understood this.

I wonder when this will be made clear?

I'm confused too.

The wotd ON shouldn't be there. The previous 2 paragraphs make it clear.

zagfles

EvieSaver wrote: »

...just confused little old me again.

How does the repayment of child benefit work through PAYE? I always thought that PAYE dealt with taxable benefits eg a company car - taxable benefit of £4000. This does not mean that £4000 is paid in tax but that a rate of tax is paid on this amount, the tax rate depends on earnings. So it could be that 2 people with the same car but with different earnings could pay a different amount of tax eg £4000 car benefit x 40% and the other £4000 car benefit x 20%. Is this correct?

If so then how will they know what the taxable amount is needed to repay the child benefit received? Just because someone earns in the 40% tax bracket one year does not mean they will the next year. For example if a person needs to repay child benefit of £800 this would require a PAYE tax code adjustment of 2000 for a 40% tax payer but a 4000 adjustment for a 20% tax payer. How will HMRC know what adjustment to make? Or have I just got myself even more confused now?

I think I've got my brain in knots.

They guess, based on what they think you'll earn. Just like they do now if you pay 40% tax and have taxable interest/dividends or pay into a private pension.

waccamole

zagfles wrote: »

This explains it (link removed as I can't post it due to being a new user)

That's the document I was talking about - I was trying to find out from HMRC what 'adjusted net income' means in layman's terms

zagfles wrote: »

What HMRC told you above is rubbish. .

My thoughts exactly - but he was so sure and put me on hold whilst he checked with colleagues.

zagfles wrote: »

You are not taxed on the amount of child benefit like a company car. You face a tax charge of 1% of the amount of child benefit you received for every £100 you earn above £50,000. This means you lose the whole lot if your "adjusted net income" is £60,000 or above.

That's my understanding too. But trying to work out what 'adjusted net income' means to me.

zagfles wrote: »

Your post above is confusing. You say your "P60 gross income" is over £60,000 but your "post salary sacrifice" income is less? That can't be, if it's actually "salary sacrifice" then that will lower your P60 income. That's the whole point of salary sacrifice. .

Hmmm...think maybe he's got me confused - I'll have another look at my P60. He gave me the impression that salary sacrifice made no difference as I'd 'still had the money as income, it just wasn't taxable'.

zagfles wrote: »

If you salary sacrifice for benefits which are taxable, then the taxable value of those benefits will be added to your income for tax (and the child ben charge) so the effect may be minimal if anything (you'll probably just save NI at 2%). The effect may be different for stuff like company cars since the taxable value bears little relation to the actual cost, so you could win or lose on this.

Salary sacrifice for stuff that's not taxable is the best way to go, eg pension, extra leave etc.

Thanks this is helpful though I'm more worried about sacrificing too much, still losing the child benefit (in tax) and having too little income to live on as I've sacrificed it away. (I can only adjust my salary sacrifice items once a year in April.)

zagfles

waccamole wrote: »

That's the document I was talking about - I was trying to find out from HMRC what 'adjusted net income' means in layman's terms

What part specifically don't you understand? It's "total of the individual’s income subject to income tax less specified deductions", which it lists. If you're an employee with no other income, and you don't contribute to a personal pension or use gift aid, it's your P60 income plus your P11D (taxable benefits). Then there's the stuff about trade unions/police etc which probably won't apply (most trade union subs aren't tax deductable).

Cook_County

Well...actually nobody knows - including HMRC; as most of the details are still to be invented. Let's see what happens on 5th December, if anything.