Child benefit "high earner" tax

kenville

Good afternoon.

I'd be grateful for some clarification on how the child benefit tax gets paid back.

I'm an employee and therefore on PAYE. Last tax year (14/15) I earned over £50k and that means I now need to do a self-assessment.

How does this tax get paid back? Do i have to pay it back out of net pay? Does it have to be paid in a lump sum? Are there deadlines for when it has to be paid back?

In the current tax year (15/16), I'm probably going to be earning over the £60k threshold so would that only be paid back after this tax year has concluded?

Thanks

MoneyMission2015

In our case my husbands tax code was adjusted so its paid back that way.

kenville

Hi. Thanks! Does it get paid back in equal installments over a year? Or a lump sum (gulp!)? And when does it start to be paid back?

mgdavid

kenville wrote: »

Hi. Thanks! Does it get paid back in equal installments over a year? Or a lump sum (gulp!)? And when does it start to be paid back?

as MM2015 already said, it's usual for it to happen via adjustment of tax code. Obv that means it happens every time the tax code is used, if you are paid monthly then it will effectively be repaid monthly.

The SA has to be done first, then an amended Coding Notice gets issued, then the tax is adjusted on paydays. So it might be over 12 months or however many months are left in the tax year.

xylophone

Have you considered increasing pension contributions?

http://www.theguardian.com/money/2013/sep/28/child-benefit-pension-contributions-higher-earners

Spidernick

It's not a 'tax' as such but a claw back of the excess to which you are entitled. It would form part of the liability on your Self Assessment tax return and would be payable by 31 January following the end of the tax year, unless it can be coded out in a later tax year.

Once the return is filed (and you should register asap by the way), HMRC will probably also adjust your current year's tax code on the basis that the same claw back will apply to that for the return just filed. If that happens then some of the 'claw back' would be paid at source via PAYE, but if you go over the £60K taxable income then the whole amount would be clawed back.

As above, you might want to consider pension contributions to reduce your taxable pay. My effective savings rate with three kids and a SMART pension (with NI relief) is about 66.75% (40% tax, 2% NI and 24.75% Child Benefit not clawed back), so a 'no brainer'!

kenville

Aware of pensions option but to be honest, as a single earner, don't think i can afford it what with having to pay for the mortgage and everything else myself. I do chuckle at being labelled a high earner when surely household income is what matters. Anyway, can't change the rules....

The one thing I'm not entirely clear about is that the self-assessment and tax payable is based on last year's pay. But one of the posts above suggest that HMRC will also take this year's as well which essentially feels like a double-whammy. If self-employed don't have to do that, why should PAYE people?

kenville

Looking at SA site now and there's two sets of questions/

(i) If you are submitting by 30 December, owe tax for 2014-15 and have a PAYE tax code, do you want us to try to collect the tax due (if less than £3,000) through your tax code for 2016-17?

(ii) If you are likely to owe tax for the current tax year (ended 5 April 2016) on income other than employed earnings/pensions e.g savings or the High Income Child Benefit Charge, do you want us to use your 2015-16 PAYE tax code to collect that tax during the year?

If I Select Yes to (i) then does that mean I start to pay the CB tax due for 14/15 next year?

If I select No to (ii) then I assume that means i pay back this year's CB tax in the year after? If I select Yes then I start paying this year's now and last year's next year?

I'm confused!

Spidernick

In answer to your questions:

(i) Your 14/15 liability will be collected in 16/17 if you answer 'yes'. If you answer 'no' you have to pay the whole lot by 31 January 2016;

(ii) If 'yes' then your anticipated 15/16 liability will be collected (as far as possible, as the year has already started) in 15/16. If 'no' then the full underpayment will flow through to your 15/16 tax return.

Think of it this way: let's assume you will have an overall tax bill of £1,000 for each of 14/15, 15/16 and 16/17 (including the the child benefit claw back). This will be resolved as follows:

14/15 will be collected in 16/17 (if you opt for this);

15/16 will largely be collected in 15/16 (again if you opt for this), but not in full as your code will be reduced partway through the year (and you suggest your earnings will be even higher that year so the claw back will be greater). Any balance can probably be collected via your 17/18 code (i.e. the next full year after your 15/16 return is submitted; and

16/17 will collect the actual 14/15 underpayment plus the anticipated 16/17 underpayment, so a total of £2,000 for that year.

I wouldn't discount the pension payments quite so readily. If you have only one child then the effective rate you pay will be lower, but for me if I don't pay into the pension then for every £100 I am paid over the £50K I will only see about £33 of this, which is a good way to look at it, I feel. Putting money in a pension is an investment at the end of the day, and a very cheap one at that when you have to factor in savings of child benefit. Unless you are spending every spare penny you have, personally I would prioritise the pension above mortgage overpayments and building up cash reserves (once a suitable level of 'slush fund' is reached), but it's your choice at the end of the day.