Impact of Basis Period Reform on Tax Charges

Tax Question

How will the reform of the basis period impact the tax charges arising under the Student Loan and the High-Income Child Benefit charge?

Tax Answer

The treatment of both of these charges differs in their treatment by HM Revenue & Custom during the basis period.

Firstly, the Student Loan repayment charge will be calculated using the assessable profit the period plus the ‘transition profit for the 5 years commencing from 2023/24.

The transition period you will recall is the period of account that covered the period from the end of the previous accounting period to 5 April 2024 as set out in BIM81290.

In addition to this and on a non-related tax matter, this figure, including the transitional profits, will need to be included when dealing with student loan finance applications.

The impact of this could have potentially two implications.

1. A higher student loan repayment charge.
2. A reduction in the amount of maintenance loans that individuals will be able to obtain.

In the matter of the Student Loan Repayment Charge it may be beneficial to spread the transitional profit to a period less than five years as per BIM81310.

However, the calculation of the High-Income Child Benefit Charge is not affected in this way. For the years 2023/2024 onwards the charge will be calculated on the annual profits for the period excluding the transitional profits spread from 2023/2024. As a result of this treatment individuals will not be drawn into the charge by virtue of the ‘transitional profits’ taking their income above the £50,000 threshold where the process of clawing back the benefit begins.