What do you need to know?
Introduction
Navigating the complexities of the UK tax system can be challenging, especially when certain charges catch you off guard. Among these often-overlooked areas are the High-Income Child Benefit Charge (HICBC) and pension-related tax charges. These can be significant, but many taxpayers are either unaware of their existence or unsure of how they apply. In this article, we’ll explore both, explaining why it’s crucial to stay vigilant.
The High-Income Child Benefit Charge (‘HICBC’)
The HICBC is an additional tax that affects those who claim Child Benefit but earn above a certain threshold. Introduced in 2013, it’s aimed at clawing back Child Benefit payments from higher earners. Despite being in place for over a decade, many taxpayers remain unaware of the charge, often to their detriment.
The charge applies when either the claimant or their partner earns more than £60,000. As the income level rises, a portion of the Child Benefit is effectively taxed away, and when the income reaches £80,000, the full amount of the Child Benefit is taxed back.
Let us explain
For example, for every £2,000 earned above £60,000, 10% of the maximum Child Benefit amount entitlement but be paid back. Therefore, if an individual were to earn £75,000 a year, they must pay back 75% of their Child Benefit receipt. In turn, once £80,000 is hit by an individual, the charge will be equal to 100% of entitlement.
What makes the charge tricky is that it applies to the higher earner in a household. Even if that person isn’t the one receiving the benefit. This can catch many families by surprise, particularly those with fluctuating incomes or those unaware they crossed the threshold. Failure to register for the HICBC can result in penalties, and many don’t realise they need to notify HMRC if their circumstances change.
Pension Charges for High Earners
Pension contributions are another area where high-income individuals need to be cautious, particularly due to the Annual Allowance and the Tapered Annual Allowance.
The Annual Allowance is the maximum amount of tax-relieved pension contributions you can make in a given tax year, recently increased to £60,000. If this limit is exceeded, taxpayers may face an additional tax charge on the excess.
For high earners, the Tapered Annual Allowance further reduces this cap. If your “adjusted income” (your total taxable income, including pension contributions) exceeds £260,000, your annual allowance decreases by £1 for every £2 of income above this threshold, down to a minimum allowance of £10,000.
Let us explain
To illustrate this, lets focus on an individual with an adjusted income of £320,000 including pension contributions of £40,000. As this income is £60,000 above the tapering threshold, this would result in a deduction of £30,000 to the annual pension allowance. Subsequently meaning £10,000 of pension contributions will be subject to the annual pension charge.
Many high-income taxpayers contribute to pensions automatically, through salary sacrifice schemes or company contributions. This can result in exceeding the Annual Allowance without realising it, especially if your income fluctuates or increases unexpectedly.
Exceeding your Annual Allowance triggers a tax charge, which needs to be declared via self-assessment. Much like the HICBC, many taxpayers are unaware of this requirement, potentially leading to hefty charges and penalties.
Seek Advice
With careful tax planning and close monitoring of your income, you can avoid unnecessary charges. However, given the complexities involved, seeking advice from a tax professional is often the best way to ensure you remain compliant and avoid unexpected tax bills. A tax advisor can help you identify potential issues before they become problems.
Both the High-Income Child Benefit Charge and pension tax charges for high earners are areas that can lead to unexpected tax liabilities. While these charges are far from new, they remain under-the-radar for many taxpayers. By staying informed and vigilant, you can avoid falling into these common traps and ensure you’re not hit with unexpected charges and penalties.
Next Steps
If in doubt, seeking our expert tax advice can save you significant time, stress, and money in the long run. The team here at ETC Tax can advise and guide you given the complexities involved, please get in touch if you want to discuss any
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