Childcare benefit and the tax charge

Moneeza Siddiqui looks at the system of childcare benefit and the possible tax charge associated with it. 

The UK government supports households with children by paying a childcare amount to the parents or guardians. 

The benefit 

This amount is paid after every four weeks, into the account of the person making the claim for the childcare benefit. It is paid according to the following rates: 

Eligibility 

An online claim can be made by UK residents or persons with settled status, who are looking after children of their own, of someone else, or adopted or foster children. 

While the claim can be made by only one guardian, it can be made for any number of children, provided the dependents are: 

• below 16 years of age; or 

• below 20 years of age but involved in full-time education. 

The impact 

The children for whom the claim is made are provided with a National Insurance number and the guardian is provided with National Insurance credits, which ensures that their National Insurance record remains active, even if no actual contributions are being made.  

Generally, the benefit amount itself is a tax-free support that goes towards childcare expenses, but it could become taxable if the adjusted net income of the sole or either of the guardians totals more than £60,000 per annum (previously £50,000). 

Adjusted net income 

Adjusted net income (ANI) is the sum of the individual’s taxable income in a tax year, which could include: 

• gross salary (including bonus, taxable benefits, etc.); 

• taxable profits; 

• rental income; or 

• interest income or dividends. 

It is adjusted by: 

• pension contributions – the amount actually paid; and 

• gift aid donations made in the same tax year. 

The ANI is calculated for the individual who earns taxable income in a tax year, which could be both the parents or guardians as well. If the individual ANI of the income earners is less than or equal to £60,000 in the year, the childcare benefit will be tax-free. 

However, if the ANI of even one guardian is more than the set threshold, the government will start clawing back the benefit by imposing a tax charge. 

The tax charge 

The application of the tax charge can be summarised as follows: 

In the extreme case where the ANI of one or both guardians individually is greater than £80,000, the entire child benefit amount received in the year is treated as the tax charge. 

In a dual guardian scenario, the tax charge is paid by the individual who earns the most, irrespective of who made the claim.  

Example 1: High-income earner  

If Adrian and Beth have received a total of £2,300 childcare benefit in a year and have ANI of £54,000 and £81,000, respectively, then Beth, being the higher-income earner, will add £2,300 to her tax payable amount as the tax charge.  

Beth will have to include this in the self-assessment tax return or pay a fine of 10%-30% of the tax owed plus any interest charged by the tax authorities in the case of non-payment. 

Example 2: Tapering of the child benefit  

If Cara has received a total of £1,500 childcare benefit in a year and has ANI of £68,000, she will have to pay back 1% of the benefit amount for every £200 earned over £60,000. This is calculated as: [(£68,000 - £60,000)/£200] x 1% x £1,500 = £600. 

Cara will add the £600 to her tax payable amount for the year.  

High-income earners should still make a claim for the childcare benefit so that the National Insurance credits linked to the benefit can help ensure their eligibility for government benefits such as the state pension. 

Practical tip 

Increasing pension contributions or gift aid charitable donations in a tax year can help reduce or avoid the tax charge.