The vast majority of people are unaware of child benefit tax, despite its nine-year history in the UK.
Research from insurer NFU Mutual found 84 per cent of people were unaware of the tax, called High Income Child Benefit Charge, which was introduced in January 2013.
The charge applies to anyone with an income above £50,000 who gets child benefit, or whose partner gets it.
NFU Mutual polled 2,100 people at the end of January and found awareness of the tax was low in all age and social groups.
An IFS report from 2019 estimated the tax would reach 1.6mn families by 2022/23, as income thresholds have been frozen, dragging more people into the mix.
Sean McCann, a chartered financial planner and marketing compliance & technical advice manager at NFU Mutual, said: “These figures confirm that High Income Child Benefit Tax often comes as a shock to many people.
“Many families don’t realise they have to repay some or all of their child benefit once the highest earner’s income exceeds £50,000 – it's not until the letter from HMRC arrives that they become aware.
“It can mean some end up with tax bills for thousands of pounds, and more families are getting caught by this tax each year as wages increase.”
How the charge works
The tax charge applies to people with an 'adjusted net income' of above £50,000 but increases gradually for taxpayers with higher incomes.
The charge is 1 per cent of a family's Child Benefit for every £100 of income that is over that threshold each year.
If an individual's income is over £60,000, the charge will equal the total amount of the Child Benefit.
The charge also bites if a benefit recipient's partner earns above the threshold.
Is it fair?
Opinion is split over whether or not the charge is fair, NFU Mutual found, as 58 per cent of respondents thought it was fair compared to 42 per cent who thought it wasn’t.
The older people get, the more likely they are to think it’s a fair tax, the mutual said. Two thirds (67 per cent) of over 65s thought it was fair compared with just 37 per cent of 18-24 year olds.
The bone of contention was the way the charge is structured, the fact that a family with two earners at £50,000 faced no charge, whereas a family with one earning above that faced the charge, he said.
McCann said: “The £50,000 threshold for paying the tax has been frozen at that level since it was first introduced in 2013. A tax that was initially designed to be paid by those on a ‘high income’ is now hitting some basic rate tax payers which many view as unfair.
“The fact that a single earner in a household with income of £60,000 would need to repay all their child benefit, while a separate household with two earners each earning £50,000 would keep all theirs is one of the reasons it’s viewed by some as an unfair tax."
