Mistakes made when claiming higher rate child benefit are most frequently the result of poor communication from HMRC and it is more difficult for those with complex, fluctuating earnings
The high income child benefit charge (HICBC) raised £416m in 2019-20 but it is a hard tax charge to administer as many of the families affected still do not know about the charge and complying with it may involve new tax compliance obligations. An estimated 630,000 people are liable for the tax charge, according to a Freedom of Information request by Quilter.
The charge was introduced in January 2013 and applies to anyone with an adjusted net income over £50,000 who receives child benefit, or whose partner gets it. The tax charge is equal to 1% of the total child benefit received for every £100 earned over £50,000. For those with an adjusted net income in excess of £60,000, the tax charge is equal to 100 per cent of child benefit payments received.
Research commissioned by HMRC has identified four main barriers which led to taxpayers either failing to take action in relation to the charge, taking action too late or making errors.
It was common for people to experience multiple barriers at different stages of their application process, which sometimes led to repeated errors.
The main obstacles were:
- lacking awareness of the charge, sometimes several years into building up the charge;
- not accurately understanding important details of HICBC or child benefit, eg, that it is the taxpayer’s responsibility to notify HMRC or that child benefit is paid every four weeks;
- not understanding the process of complying, eg. completing self-assessments, paying through tax code adjustment or opting out; and
- having complex earnings in the form of composite or fluctuating incomes leading to errors in accurately paying the charge.
Participants reported that communication from HMRC could sometimes exacerbate these barriers, particularly where initial letters were not targeted or clear, or communication about ongoing compliance was delayed.
Communication from HMRC was seen as a helpful source of support by participants who did not understand their role, lacked confidence in their capability, or needed to organise a payment plan to pay the charge they owed.
But respondents generally wanted to see improvements in the quality of communications from HMRC to improve understanding of taxpayer liability. They wanted to see improvements in the understanding of the process of meeting liability by ensuring taxpayers have access to the help they need to pay the charge. People also wanted clearer and more comprehensive information available online. Promotion of existing tools such as the Child Benefit tax calculator could help to meet this need.
It is the responsibility of the individual taxpayer to notify HMRC of liability for the charge via self assessment and since it was introduced nine years ago, there has been ongoing criticism of the quality of communications and clarity about the charge. There are also issues when people opt out as they can lose national insurance contributions credit which contribute to the state pension. These can be paid separately as a top-up but this is also not widely known.
For participants who opted out, their decision was largely driven by the knowledge that they would not gain anything financially (all had an individual income more than £60,000). A further motivation for opting out was to avoid the administrative burden, including filing self assessment returns, associated with paying the charge.
The report concluded: ‘Despite increased activity by HMRC to help customers to comply with HICBC, there is evidence of some groups of customers returning to non-compliance following an intervention from HMRC. Supporting customers to comply with HICBC therefore remains a priority for HMRC.’