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Helping with the HICBC

Of all areas of tax, the High Income Child Benefit Charge – HICBC – perhaps grates most with taxpayers. Although it has been with us for almost seven years, it continues to frustrate, as highlighted by a recent debate in the House of Commons and before that, by HMRC’s decision to review a number of failure to notify penalties. In this article, I’ll explain how the HICBC works, look at why it is so troublesome to deal with and explore what we, as accountants, can do to help our clients with the HICBC.

What is the HICBC?

The idea of capping child benefit for higher earners was first floated by the then Chancellor George Osborne in 2010, and was confirmed in Budget 2012. The policy rationale was clear: given the then state of the public finances, the country could not afford to help high earners with the costs of raising their children. Child benefit has always been and remains a universal benefit; the cap is applied by way of an income tax charge – the HICBC – imposed by ITEPA 2003, s. 681B.

Who pays the HICBC?

To determine if the HICBC applies for a person (P) for a tax year, we need to ask the following questions:

  • Question 1: Does P’s adjusted net income (ANI) for the tax year exceed £50,000?

Yes: proceed to question 2.

No: the HICBC does not apply for the tax year.

  • Question 2: was P or, where relevant, P’s partner (Q), entitled to receive an amount of child benefit for the tax year?

Yes: proceed to question 3.

No: the HICBC does not apply.

  • Question 3: Does P’s ANI for the tax year exceed that of Q?

Yes: the HICBC applies to P for the tax year.

No: the HICBC applies to Q for the tax year.

How is the HICBC calculated?

The charge is equal to x% of the amount of child benefit received (s. 681C). Where P’s ANI is £60,000 or more, x% is 100%; where P’s income is between £50,000 and £60,000, x% is given by the formula ((ANI – £50,000) ÷ 100), rounding down to the nearest whole number. This is best illustrated by an example.


Paul and Harriet have two children. Child benefit is paid to Harriet and for 2018–19, this amounted to £1,788. Paul’s salary for 2018–19 was £54,000 and Harriet’s was £38,000.

Paul is liable to the HICBC for 2018–19 as: his ANI for the year (£54,000) exceeded £50,000 (qn. 1 above); his partner, Harriet, was entitled to receive child benefit (qn. 2); and Paul’s ANI exceeded that of Harriet.

The amount of the charge is £715, calculated as follows:

((£54,000 – £50,000) ÷ 100) = 40

40% × £1,788 = £715

HMRC provide a useful HICBC calculator.

How is the HICBC paid?

The charge is accounted for through self-assessment. Rather than receive child benefit and pay the charge, the taxpayer could consider: (1) not claiming child benefit (an existing claimant can stop child benefit using this online form); or (2) claiming child benefit but opting for it not to be paid (box 68 of form CH2; SSAA 1992, s. 13A). An advantage of option 2 is that it protects entitlement to the state pension – more on this below.

Issues with the HICBC

The main issues identified with the HICBC are summarised below:

  • It is perceived as being unfair. There are three strands to this argument:

– It is based on the individual’s income, not household income. This means that a single-earner household with income of £60,000 loses all of its child benefit and a two-earner household where both earners earn £49,999 gets to keep all of its child benefit. The Government’s rationale for basing the HICBC on the individual’s income was that to do otherwise would require the introduction of a new means test, creating a new administrative burden for HMRC and for taxpayers;

– It gives rise to a high marginal rate of tax. For an employee, the marginal rate of tax and NICs for income falling in the £50,000−£60,000 bracket is 53% where they have one child; 60% for two children and 67% for three children. In addition to being quite annoying for the individual, this can impact on decision making; faced with keeping only 33% of what they earn, an employee may choose not to do overtime or to seek a promotion, for example; and

– It’s too complicated. Increasingly, it seems that a taxpayer who wants to stay on the right side of the tax system has two options: (1) pay an accountant; or (2) devote at least one day a week to poring over complicated tax law just in case it may apply to them one day. And so it is with the HICBC where there is lots of scope for making an error; for example, the lower limit of £50,000 is before deducting the personal allowance; it does not matter that the child benefit is not paid to you, or that you are not a parent of the child; and you move in and out of it as your income rises or falls and as your circumstances change.

Anecdotal evidence suggests that many people who would keep all or part of their child benefit give it up rather than risk making an error. And who could blame them: the records show that up to and including 2017–18, HMRC issued approximately 97,500 failure to notify-type penalty assessments. Earlier this year, HMRC reviewed their approach to penalties, and in particular the reasonable excuse defence, and cancelled penalties for roughly 6,150 taxpayers.

  • More people are now subject to the HICBC than originally intended. This is down to two factors:

– Fiscal drag. The lower limit for the HICBC has been set at £50,000 since it was introduced almost seven years ago; in other words, it has not increased in line with prices or earnings. A consequence of this is that more taxpayers now fall within the HICBC, as is demonstrated by figures published by the Institute of Fiscal Studies (IFS) earlier this year: in 2013–14, 1m families lost at least some Child Benefit; for 2019–20, the IFS estimate that this figure will increase by around 370,000. This represents a 37% rise in the number of families falling within the HICBC net; and

– Interaction with new legislation. In particular, I’m thinking of the restriction on finance costs for landlords of residential property which has changed the way in which relief is given for mortgage interest. For 2016–17 and earlier, this was deducted in arriving at the taxable income of the property business; for 2019–20, only 25% is deducted in this way with relief for the remainder given by way of a reduction in the tax bill. This has had the effect of increasing the amount of taxable income and so bringing more people into the HICBC net. This is particularly frustrating for unintentional landlords, i.e. those who were forced to let their property because they cannot sell it in the current market

  • It’s creating problems for the future. A parent may be credited with having made Class 3 NICs contributions where they are registered for child benefit for a child under 12. The purpose of this is to help the individual maintain their NICs record where they have taken a break from work to care for their young children, protecting the individual’s right to a state pension, for example. If a person does not register for child benefit then this opportunity is lost. In a policy paper published in 2016, Royal London estimated that £278m in pension rights had been lost in this way in 2014–15 and 2015–16 combined.

How you can help your clients

As the saying goes, forewarned is forearmed: the first step in helping your clients to manage the HICBC is to make sure that you understand it. This will enable you to put procedures in place to spot those clients most likely to fall foul of the HICBC; for example, in light of the changes to the rules for finance costs for landlords, it may be appropriate to review the position for taxpayers with a property business, for this year and next year when the restriction takes full affect. That done, you can then begin the process of making your client aware of the HICBC. The worst-case scenario is that an HICBC liability comes to light only once you have completed your client’s tax return. At that point, it is too late to take any action to reduce or extinguish the charge and the client may only have a few weeks to go before payment is due.

The next step is to consider if any action could be taken to reduce the amount of the HICBC, or even to avoid it altogether. The amount of the charge is determined by two factors: (1) the amount of child benefit received; and (2) the individual’s adjusted net income (ANI). The individual could address the first point by, depending on their circumstances, not claiming child benefit, stopping a claim for child benefit or by electing for child benefit not to be paid. As set out above, there are a number of issues to take into account here, not least the impact on state pension rights. I would recommend referring your client to the guidance on GOV.UK.

The second factor – the individual’s ANI – allows for some element of tax planning. Broadly, ANI is the taxpayer’s net income – being total income from all sources less loss relief, etc. – less the gross amount of any pension contributions and Gift Aid donations made by the individual (ITA 2007, s. 58). Note that no account is taken of the personal allowance or the £2,000 dividend allowance in calculating ANI.

It may be that your client could reduce their ANI by:

  • deferring taxable income. Perhaps of all taxpayers, the owner-manager of a small company has the greatest degree of flexibility as to how and when they receive taxable income; for example, it may be that the charge could be reduced or perhaps extinguished by deferring the payment date for a dividend. It is important that the HICBC is factored in to all remuneration planning exercises;
  • making a pension contribution. For the individual, this would mean increased wealth overall but less cash in their pocket. It is important that an individual thinking of making a pension contribution considers the need for independent financial advice; or
  • making a Gift Aid donation. Remember that an individual may elect to treat a donation as having been made in the previous tax year in some circumstances.

Given the high marginal rate of tax that applies to income within the HICBC band, this could make a significant difference for your client.

Concluding comments

In the debate referred to above, Craig Mackinlay, Conservative MP and a chartered accountant and chartered tax adviser, commented that the HICBC is ‘a salutary lesson in how not to withdraw a universal benefit through the tax system’. The HICBC would appear to be an example of ‘square peg, round hole-type’ tax policy-making; clearly there are lessons to be learned for the Government going forward but for us as accountants, there is much we can do now to ease the burden for our clients.

By Croner Taxwise