More Families to Face Higher Taxes by 2028 Due to Child Benefit Threshold
Increased Number of Individuals to Face Child Benefit Tax Due to Fixed Tax Thresholds
Listen up, folks! The amount of households facing higher taxes is set to skyrocket by 2028, thanks to the rise in income and frozen thresholds. This means more families will hit the child benefit threshold, according to exclusive figures shared with This is Money.
Jeremy Hunt, the former Chancellor, raised the threshold at which the Government started clawing back child benefit from £50,000 to £60,000 last year, hoping it would lower the number of families paying the higher marginal tax rate. But, new stats reveal a different story.
Frozen income tax thresholds and increasing wages will actually cause more families to fall under the tax net. By the 2028-29 tax year, an additional 50,000 families will have to pay the High Income Child Benefit Charge (HICBC). That's a whopping 14% increase since the last tax year!
If one of your household's highest earners makes more than £60,000, you'll have to start giving back part of your child benefit, at a rate of 1% for every £200 of income over £60,000. Once their adjusted net income reaches £80,000, you'll have to repay all child benefit received, and many families just opt out of it.
By 2028-29, a total of 376,000 families will pay the HICBC, up from 325,000 in the last tax year. This increase will generate an additional £116 million in tax revenue from 2024-25 to 2028-29.
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More families may be affected in the coming years, but recent figures show that fewer households had to pay the charge this year compared to last year.
In the 2023-24 tax year, only 75 penalties for 'Failure to Notify' were issued, down from 7,007 the year before. The total value of the penalties dropped from £4.5 million to £45,443.
The decline in penalties suggests that the change in the threshold has made a difference, and growing awareness might have motivated some parents to settlement salary into a pension to avoid the charge.
However, as more families earn between £60,000 and £80,000 due to the frozen tax thresholds, they will gradually be caught in the child benefit tax trap.
Sean McCann, a chartered financial planner at NFU Mutual, warns that many individuals are still unaware of the need to inform HMRC once their income exceeds £60,000 and pay any child benefit tax charge due.
Without proper information, significant arrears can build up over several years, leading to unexpected large tax bills. This can be a problem for couples who don't usually share their earnings with each other.
Insights
The freeze on income tax thresholds in the UK is an example of fiscal drag, where static tax thresholds and allowances cause more individuals to move into higher tax brackets as their incomes rise due to inflation and other economic factors. This economic phenomenon has far-reaching effects, not only on the child benefit system but also on the overall taxation structure.
References:[3] "Fiscal drag," Investopedia, https://www.investopedia.com/terms/f/fiscaldrag.asp[5] "The taxpayer's dilemma: Put up or shut up?," BBC News, https://www.bbc.com/news/58326780
- By 2028-29, a total of 376,000 families will pay the High Income Child Benefit Charge (HICBC), demonstrating an increase of 14% since the last tax year, showcasing the potential impact of inflation and frozen income tax thresholds on personal-finance and taxes.
- This increase in HICBC payers will generate an additional £116 million in tax revenue from 2024-25 to 2028-29, signifying the importance of understanding tax implications, especially with regards to child benefit, as part of effective investing and finance management.
- If one of your household's highest earners makes more than £60,000, you'll have to start giving back part of your child benefit, underlining the significance of keeping an eye on income thresholds to avoid unexpected taxes and potential financial distress.
- The decline in penalties for 'Failure to Notify' suggests that the change in the child benefit threshold has made a difference and growing awareness might have motivated some to invest in pension plans as a strategy to avoid the HICBC.
- Without proper understanding and adherence to reporting requirements when income exceeds £60,000, significant arrears can build up over several years, emphasizing the need for individuals to stay informed and engage in personal-finance literacy as a means of minimizing tax-related problems.
