Thousands of parents penalised over child benefit tax trap

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Thousands of parents have been charged unexpected penalties for failing to tell the UK tax office they claimed child benefit, with experts warning many are “caught unawares” by the requirement to notify HM Revenue & Customs.

A freedom of information request seen by FT Money found that 6,652 parents had been issued with Failure to Notify penalties in relation to a child benefit tax charge in 2022-23 — up from 4,881 in 2021-22.

Overall, 19,876 people who do not normally file a self-assessment return had been issued with such penalties since 2019-20.

The penalty is typically between 10-30 per cent of the tax due, which is itself based on income and the number of children a person has. Child benefit is £1,250 a year for the first child.

The FOI was submitted by Dan Neidle, a tax lawyer and founder of Tax Policy Associates think-tank. He said the rules were a “trap” for people on PAYE who do not normally file tax returns and were “understandably unaware” of their requirements. “I think it’s a scandal,” he said.

Under controversial rules in place since 2013, the amount of child benefit is limited if an individual or their partner earns more than £50,000 a year. It is withdrawn completely if one partner earns more than £60,000 a year.

Those affected must either complete a self-assessment tax return to repay the difference between what they received in child benefit and their entitled amount, or officially opt out of receiving the benefit. If a person does not normally submit a tax return, they must register to file a return to pay the tax, known as the high-income child benefit charge (HICBC).

Neidle said: “In most cases the government has the data to know when the HICBC charge should apply . . . Expecting someone not on self-assessment to file themselves, and hitting them with a penalty if they don’t, is just wrong.”

He also argued that the creation of the charge in the first place was a “desperately stupid policy” and that the measure was deterring people from working.

He cited a message he had received from a social worker with three children. The person had cut their working hours so their earnings did not go over £50,000, after calculating that for every £1 over £50,000 they would earn just 15p.

Stephanie Court, tax director at accountancy firm RSM, said the rules “capture a lot of people who are within the PAYE system and don’t file returns, so it catches people unawares”. These people were “easy targets for HMRC”, she added.

She argued that the tax authority should do more to inform and educate people about the charge.

“[Instead] HMRC has this campaign to educate people through enforcement. Evidently there are many people who still don’t know they are caught by the rule,” she said.

Changes to the law last year will make it easier for HMRC to collect unpaid taxes from parents for up to four years, Court said. These amendments were made by the government after a taxpayer won a case at the Upper Tribunal against HMRC’s attempts to backdate unpaid high-income child benefit charges.

Meanwhile, Helen Thornley, technical officer at the Association of Taxation Technicians, a professional body, warned that more people are currently being drawn into paying the charge. This is because of an uptick in wages pushing people over the £50,000 limit, and increased savings income boosted by higher interest rates.

Individuals, especially those solely within PAYE, may not realise that the income used to calculate the £50,000 threshold includes unearned income such as savings interest and non-cash remuneration such as benefits in kind, she added.

In July, the government promised to make it easier for people to pay HICBC via PAYE, but it has yet to give full details or say when this might happen.

The Treasury said: “The charge means that the government can support the majority of families while ensuring stable public finances.

“The government has recently announced improvements, taking steps to allow employed individuals to pay HICBC through their tax code and parents to receive a National Insurance credit retrospectively.”