Nobody loves a good sob story than the British and this is one I saw this week (although it might be doing the rounds) Daily Record Grimsby debt story
I have no sympathy (as you might expect) but my reasons need some explaining.Howcana
For a bit of background information; child benefit is paid to all parents/guardians of children in the UK. You do need to register for it but it’s easy to do and payments are maid 4-weekly until the kid stops being a kid at 16 or 20 if in education or training (or your circumstances change like divorce/separation).
By claiming Child Benefit:
- you can get National Insurance credits which count towards your State Pension (very important for Early Retirement plans)
- your child will automatically get a National Insurance number when they’re 16 years old (so you can look cool with a NI card in your wallet beside your fake ID)
If you choose not to get Child Benefit payments, you should still fill in and send off the claim form just for the NI credits.
It’s not much but tax free – only £20.70 a week for the first kid and £13.70 for each kid thereafter. For our two we get £34.40 per week (£137.60 4-weekly or £1788.80 per annum).
Compared to other countries in Europe it’s shit – you get more in Poland FFS! But the UK is funny like that, you get millions of families living off in work benefits like Child Tax Credit that can easily add up to £10,000+ a year in free money.
So far, so easy – let’s make it more complex
From 2013 the government introduced the High Income Child Benefit Tax Charge meaning if a single earner in a household claiming child allowance earned more than £50,000 then the allowance is cut by 1% for every £100 extra earned and at £60,000 it disappears. You still crucially get NI Stamps though.
Now, this is a little blunt and two earners at £49,000 aren’t affected but one earner at £60,000 losing everything. People weren’t happy and in the case of our sad face story it can trap people by accident especially since what the government classes as taxable-income includes Benefits In Kind (BIK).
The story is that before the Mr Grimsby wasn’t earning above £50,000 but got a pay rise in a new job. This included a company car (which is a BIK and was reported on his P11D) which took his total taxable income above £50,000 meaning he lost some of his child benefit entitlement whilst still claiming. The HMRC come after him for a total of £7,400 that he was not entitled to and he comes crying. They say that they can’t afford to pay this debt and it’s probably causing a lot of hurt, anger and stress – poor family.
What went wrong
Ignore how you feel about this case or the HMRC. How can it be that getting a substantial payrise (and a free car) can make you poorer? The answer is lifestyle inflation. You can bet that they spent all that money before they earned it and paid their taxes.
How to avoid it the GFF way
There are simple ways to reduce your taxable income like paying into your pension and making charitable donations. We’ve been potentially affected and I’ve used the benefit of having money to ensure that we weren’t. Anyone paying 40% tax would be mad to not pay into their pension – he should have done that. He was taking home more money than before so he should have been able to engineer his finances to cap earnings at £50,000 – having his cake and eat it too.
Also, there’s flexibility on company cars. I had a car allowance once and opted for the cash option (Tax + NI) but the car I eventually bought cost £8k. How much do you think this guy’s car was?
This is a classic case of lifestyle inflation.
Don’t hate the game if you don’t know the rules
Ignorance is no defense when it comes to the law or taxes. The changes were well publicised at the time and moaning about it won’t change things (see the WASPI problem).
It was this man’s responsibility to manage his own and family affairs, to understand the tax rules and to learn how to best navigate them. I have no sympathy for his own idiocy although it does fill my heart with schadenfreude!
Have a great weekend,