Tens of thousands of British families are set to receive unwelcome demands from the taxman, ordering them to repay state Child Benefit payments. Over the next three years, an estimated 35,000 additional households will be dragged into a repayment scheme designed for high earners, despite many feeling no better off in real terms.
The Stealth Tax Trap: How Frozen Thresholds Are Pulling In Families
New analysis from wealth manager Quilter reveals the growing impact of the High Income Child Benefit Charge (HICBC). Currently, 324,000 families repay some or all of their benefit through this charge. However, government projections indicate this number will swell to 359,000 by the 2028-29 tax year.
The core of the issue lies in frozen tax thresholds. Introduced in 2013 with a £50,000 threshold, the HICBC now applies when one person in a household earns over £60,000. This limit has not kept pace with inflation. Experts at AJ Bell calculate that had it risen with inflation, the starting point for repayments would be over £71,000 today.
"Tens of thousands more families will be pulled into the charge purely because frozen thresholds let inflation and nominal earnings shifts do the work of tax increases," explains Shaun Moore, a tax expert at Quilter. He warns that support is being withdrawn even as living costs remain high, eating into strained household budgets.
How the High Income Child Benefit Charge Works
The system is often criticised for its perceived unfairness towards single-earner households. A family with a sole earner on just over £80,000 loses all their Child Benefit. In contrast, a dual-income household where both parents earn £60,000—a combined £120,000—repays nothing.
Child Benefit is paid at £26.05 per week for the first child and £17.25 per week for each subsequent child. Under HICBC rules, for every £200 of adjusted net income earned above £60,000, you repay 1% of the benefit received. This means:
- An income of £70,000 triggers a 50% repayment.
- An income of £80,000 or more requires a 100% repayment.
A critical pitfall for many is that the calculation uses adjusted net income, not just salary. This includes bonuses, savings interest, property income, and dividends. A one-off bonus or unexpected investment return can easily push someone over the threshold.
"Many families only realise they are caught after the fact," says Moore. "It often comes as a surprise when a letter from HMRC arrives, because the charge is not applied automatically."
How to Avoid an Unexpected Tax Bill
There are legitimate strategies to reduce your taxable income and potentially avoid the charge. Charlene Young, a senior expert at AJ Bell, highlights that pension contributions can be particularly effective.
For example, someone earning £62,000 could make a £1,600 pension contribution. With basic rate tax relief, this becomes £2,000, which is deducted from their adjusted net income, bringing it down to the £60,000 threshold and avoiding the charge entirely. Higher-rate taxpayers can claim additional relief.
Similarly, donations to UK registered charities via Gift Aid work in the same way, reducing your adjusted net income by the grossed-up amount of the donation.
For those earning above £80,000, it may seem logical to simply opt out of receiving payments. However, experts generally advise still submitting a claim. Even if you choose not to receive the money, doing so protects your entitlement to National Insurance Credits, which are crucial for building your State Pension entitlement.
Anyone close to or above the threshold must proactively inform HMRC, either via a Self Assessment tax return or by arranging payments through PAYE. With thresholds expected to remain frozen, checking your adjusted net income now could prevent a significant and stressful bill later.
