Claiming Child Benefit after Divorce or Separation
In this guest blog, Sofia Thomas of Sofia Thomas Ltd examines the implications of claiming child benefit after divorce or separation.
In 2020 alone a number of cases concerning penalties for failure to declare child benefit via the tax return reached the tribunals. Managing child benefit during divorce or separation can be tricky so it’s important to understand who is eligible to make a claim and ensure that clients inform HMRC through their tax return, where necessary. Unfortunately if mistakes are made, HMRC can issue penalties for failure to declare.
As a reminder, if an individual can demonstrate that they had a reasonable excuse for not reporting receipt of the child benefit they can reduce their penalties to nil (the charge will still be payable). However, if individuals are hoping to rely on ignorance they should take heed of those who have gone before them with this argument.
In the case of Lau v HMRC [2018] UKFTT 230 (TC) the grounds of the appeal against the penalty charge were that the appellant was unaware of the new legislation. However, Judge Scott at p.33 stated ‘HMRC are under no obligation to notify individual taxpayers’ and at p.37 ‘Parliament cannot have intended ignorance of the law to be a reasonable excuse’. In another specific high income child benefit charge appeal, Nonyane v HMRC [2017] UK FTT11 (TC), at p.28 Judge McGregor stated ‘I agree with HMRC’s submissions that it is not obliged to notify all customers of changes in the law’.
Child Benefit Overview and Eligibility
Individuals with children under 16 or under 20 and in full time education or training are able to claim child benefit of £21.05 per week for the first child and £13.95 for subsequent children.
The benefit is subject to a clawback (or tax charge) if in the tax year the benefit is claimed, the individual claiming or their partner earned over £50,000.
The legislation defines ‘partners’ as:
- a married couple or a couple in civil partnership who are not separated by a court order, nor are they separated where the separation is likely to remain permanent*
- a couple who are not married / in civil partnership but who live together as if they were.
*Note that the law does not require the married couple or those in civil partnership to live together as a matter of course. This is because the charging provisions need to be extended for those people who do not live with the child as we discuss below.
Individual income versus Household income
The £50,000 threshold applies to the income of individuals and not household income.
Consider two couples, both with one child. The maximum child benefit these households can receive for the year is £1,094 (being £21.05 for 52 weeks).
Jude & Alfie have one child. They are both employed. Jude earns £45,000 per year and Alfie earns £48,000. They have a combined household income of £93,000. Jude claims child benefit and receives £1,094. As Jude and Alife are both on PAYE, they do not need to complete a tax return and as they both earn under £50,000 they do not need to repay any of the child benefit.
Alternatively, Roy and Sandra also live together with one child. Sandra earns £60,000 and Roy does not work. Roy claims child benefit and receives £1,094. At the end of the tax year Sandra will have to notify HMRC that she intends to file a tax return. This must be done by 5 October 2021. She will then have to complete and file and self assessment tax return by 31 Jan 2022 and repay the £1,094. If she fails to complete and file her return on time she could face penalties of up to £1,600.
The High Income Child Benefit Charge
This charge is always applied to the higher earner in the couple. This charge is applied via the tax return and this is why individuals who are subject to the charge must complete a self assessment return. The charge is a percentage of the benefit received. It is phased for incomes between £50,000 to £60,000. Once earnings reach £60,000 or above 100% of the child benefit is clawed back.
| For one child total benefit of £1,094 – Income claw back for earnings over £50,000 | |||||||||||
| Earnings | £50k | £51k | £52k | £53k | £54k | £55k | £56k | £57k | £58k | £59k | £60,k |
| Amount clawed back | £- | £109 | £219 | £328 | £438 | £547 | £656 | £766 | £875 | £ 985 | £1,094 |
Actions to take if the charge applies
If either the individual claiming the benefit or their live-in partner earns more than £50,000, the higher earner will have to:
- Notify HMRC of their chargeability to tax by 5 October following the tax year the benefit was claimed in (if they are not already in self assessment)
- Report the benefit on their tax return
- Pay the charge by 31 January following the end of the tax year in which the benefit was received.
Each of the above actions carries penalties for failure to complete it.
If a client has previously failed to report the benefit, they should seek tax support to notify HMRC of the error and calculate the amount of tax (and possible penalties) due as soon as possible. Notifying HMRC of any potential errors will be beneficial in mitigating penalties.
Claiming child benefit post divorce
In some cases individuals will need to look at their income, their ex’s income and then their new partner’s income as well.
The legislation provides for individuals to claim child benefit for children who do not live with them, in these cases up to 4 people will be assessed to see if the £50,000 threshold is breached.
Consider Benji and Kelly. They are divorced and have one child Roger. Roger lives with Kelly 70% of the time and with Benji 30% of the time.
Benji now lives with his new partner Martha and Kelly lives with her new partner Martin. If Benji claims child benefit, the income of Benji, Martha, Kelly and Martin will be assessed. If Martin earns over £60,000 in the tax year then Martin will be faced with the charge of £1,094 for the child benefit that Benji receives.
This area of the Tax Code is extremely complex and clients should seek advice if they need to rely on child benefit to top up any child maintenance or if they are the higher earner who could face the tax charge.
Not sure of partners’ Ex’s income?
HMRC recognises the difficulties of obtaining financial information from another person and there is a facility whereby the individual can ask HMRC to provide answers to the following questions:
- did the partner/ex-partner receive child benefit for a specific tax year?
- is the partner/ex-partner’s adjusted net income for the tax year higher than the taxpayer’s adjusted net income?
The request can only be made in writing to HMRC.
To view a helpful flowchart outlining some of the points discussed, click here.
Sofia Thomas, Director of Sofia Thomas Ltd is a specialist divorce tax adviser. Sofia and her team aim to provide straightforward advice on a range of complex UK tax issues whether that be through expert instruction or single joint expert instruction. To contact Sofia, visit her website here.
James Pirrie is a director at Family Law in Partnership. James specialises in complex financial issues and non-adversarial and cost-effective approaches to divorce and separation including mediation, arbitration and collaborative law. He helps clients take control of the issues that affect them, clarifying priorities, exploring all the options and identifying the best way forward. Contact James at E: jp@flip.co.uk or T: 020 7420 5000.
Sofia Thomas and James Pirrie have co-authored the publication “Tax Implications on Family Breakdown” which provides answers to the common problems encountered in financial remedy cases in a way that will assist professionals from each discipline. To learn more about the book and to purchase it, visit here.