How to Keep Your Child Benefit Payments if you are Self-Employed
The much-publicised changes to the child benefit system come into force today. Whatever your political and moral viewpoints on the changes, the manner, timing and method of implementation are similar to recent government tax fiascos including the 10p tax rate, millions of taxpayers on the wrong tax code, and six million people being told they had paid too much tax.
The basics of child benefit are;
- It is paid to 7.9 million families with children
- The payments are £20.30 per week for the first or only child and £13.40 for every other child
- Payments continue until the child is at least 16 but can continue until the child reaches 20
So, a family with 2 children will receive £1752.40 per year in child benefit.
We haven’t seen a reasonable explanation of why the new rules come into force on 7th January (rather than the start of the new tax year on 6th April), but the basics are:
- If either parent earns more than £60,000, the family is no longer eligible to receive their child benefit
- If the highest earner (mother or father) earns between £50,000 and £60,000 the benefit is withdrawn at the rate of 1% of child benefit for every £100 earned (so someone earning £57,000 will lose 70% of the benefit)
The complexity of implementing the changes include
- If both mother and father earn £49,000 each then the family receives its full child benefit
- If only one of the parents is working and earns £60,000 the family loses all of its child benefit
- If the parents do not live together, and do not know how much the other parent earns, then HMRC have said that they will release ‘rudimentary’ information to, say, the father who wants to find out if the mother earns more money than him. This goes against the whole concept of tax confidentiality
- Total earnings that are taken into account to see if the £50,000 limit has been exceeded include salary, dividends, benefits in kind, rental income from property, and bank interest. In most cases, this sort of information can only be measured once the tax year has ended
- If children are looked after by a grandparent for part of the week, and the parent pays some of the child benefit received to the grandparent to cover say meal costs, then the grandparent could be liable to be taxed if their earnings are above £50,000
- Thousands of tax payers will be dragged into having to file a self assessment tax return if they choose not to opt out of receiving the benefit altogether.
However probably the most concerning element of the changes are that the self employed can make some simple and legal changes to the way that they structure their tax affairs in order to preserve their child benefit.
One way (Which is also open to the employed) is to make payments into a personal pension plan which will reduce the income level at which the £50,000 is measured. For example someone with gross income of £52,000 can make payments of £2001 into a pension plan and reduce their earnings to £49,999.
An alternative way is best explained by using a simple case study.
Maggie and Gerry are married with three children. They receive a total of £2,449 a year in child benefit.
Maggie is a business owner, running her own limited company. Gerry is a house-husband looking after their three young children, and earns £10,000 a year by renting out his old bachelor flat. Gerry sometimes helps Maggie out with the business by doing the book-keeping and maintaining the company’s Twitter and Facebook pages.
Maggie earns £25,000 per year in salary, pays herself £30,000 in dividends, and also has a company car with a benefit in kind value of £7,000. Her total income of £62,000 would take her above the maximum child benefit limit and the family would lose all of their £2,449 child benefit.
The total family income is £62,000 for Maggie, £10,000 for Gerry plus the child benefit of £2,449, making a total of £74,449.
However, Maggie can make a couple of simple changes to her tax affairs in order to ‘shift’ some of her income to Gerry and reduce her income below the £50,000 limit.
- She can issue new shares to Gerry and pay him a dividend out of the company’s profits, rather than pay all of the dividends to herself. This could reduce her income below the £60,000 or £50,000 limits.
- She can make Gerry an employee of the business and pay him a salary of £12,000 for the work he does on the book-keeping and social media. At the same time she reduces her salary to £13,000, meaning that the total salary cost to her company is the same. Her income is reduced to £50,000, ensuring that she continues to be eligible to receive child benefit. Gerry’s income is £22,000, the child benefit remains at £2,449 which means that their total family income is preserved.
We’d be happy to advise clients on their own individual circumstances with regard to child benefit. In the meantime, prepare for plenty of press coverage when the changes really start to bite.