Budget Explained: More changes to tax credits and child benefit

By ACCA’s budget team

The headline change about the withdrawal of child benefit from higher rate taxpayers had been talked about for several weeks. The worrying announcements are that child tax credits backdating of claims is now down to one month and the income disregard for falls in income.

In the Spending Review 2010, the government announced a policy to withdraw Child Benefit from higher rate taxpayers.  This will be introduced in the Finance Bill 2012, and will take effect from 7 January 2013.

A new income tax charge will apply to taxpayers whose income exceeds £50,000, when Child Benefit is received by them or by their partner.  Taxpayers with income above £60,000 will suffer a charge equal to the amount of Child Benefit received.

For those taxpayers earning between £50,000 and £60,000, the charge will be 1% of the amount of Child Benefit for every £100 of income above £50,000.

Child Benefit itself will not be liable to tax, and can continue to be received in full by those claiming it.  Child Benefit claimants will be able to elect not to receive Child Benefit, if they do not wish to pay the new charge.  This election can be withdrawn if income drops below £50,000.

Some elements of child tax credits will change from 6 April 2012.  Family element will remain the same at £545, but child element will increase from £2,555 to £2,690; disabled child element from £2,800 to £2,950, and severely disabled child element from £1,130 to £1,190.

The biggest change though is the scrapping of the second income threshold of £40,000.  This means that the family element of a child tax credit claim will be withdrawn at a rate of 41%, once all other elements have been withdrawn.  Previously, this element was protected up to the £40,000 threshold , so that families with a household income of below £40,000 would still receive the full amount of £545.

It has always been possible to backdate child tax credit claims for 93 days, but from 6 April 2012, this is reduced to one month.  The income disregard remains at £10,000 for 2012-13, but will reduce to £5,000 from 6 April 2013.  This means that, in 2012-13, a claimant only has to report a change in income if it is more than £10,000 higher than the previous year.

From 6 April 2012, there will be an introduction of an income disregard of £2,500 for falls in income.  This means that if income falls by less than £2,500 in a year, there will be no impact on the tax credits award.

Remember, you can see ACCA’s budget blog from yesterday, here.