What do the changes to Child Maintenance actually mean?
There have recently been radical reforms regarding the way in which child maintenance is dealt with. The Child Support Agency (CSA) is on its way out and the Child Maintenance Service (CMS) is replacing it. However, this leads on to the question as to what has actually changed.
The answer is, quite a lot and I have identified some of the key changes below:
The calculation has shifted from looking at the paying parent’s net income to looking at their gross income after the deduction of any pension contributions that have been made. There are a number of different formulas that apply depending upon the specific circumstances of the case.
It is not practical to list all the formulas that are applied within this blog, however, for those of you who wish to find out more the following resource from the government may be helpful: www.gov.uk/how-child-maintenance-is-worked-out/how-the-child-maintenance-service-works-out-child-maintenance
However, due to the complexity of these formulas it is expected that many parents will use the online calculator tool which has been produced by the CMS.
While helpful, the CMS calculator simply produces a final calculation without showing the actual information that has been inputted to achieve the end figure. This means that the only way for the other parent to check that the information provided is correct is for them to do their own calculation and check that the results match.
However, there is an alternative. My colleague Alan Larkin has produced his own online calculator which is easy to use and will provide far more information. In his recent blog, Alan explains how this new free tool evolved out of a need to better serve parents and why it is available, for free, to all.
The benefit of Alan’s calculator is that it sets out at the end all of the information that has been provided to show how the calculation was made. This means that it is easy for both parents to check that the information that was entered was correct. The calculator can be found here: www.divorcefinancetoolkit.co.uk/child-maintenance-calculator/
In my opinion, the greatest omission to the new reforms is that dividend income is not automatically taken into account when producing a calculation as to the level of child maintenance payable.
This has serious consequences to the receiving parent as dividend income is a very common way for people to receive their remuneration in a tax efficient manner.
What this means is that, unless an agreement can be reached between the parents themselves to take this into account, the receiving parent will have to make an application to the CMS to vary the assessment.
What this will involve I do not know because, as these reforms are relatively recent, however I am not aware of any applications that have been made to date. What we do know is that there are certain criteria that need to be met and given the historic experiences that many people endured when dealing with the CSA, there is genuine concern as to what this will mean for the receiving party.
It is certainly possible that a receiving parent could find themselves in a position where they are receiving next to nothing by way of child maintenance and are unaware that the paying parent is receiving dividend income or are unaware that they can potentially do anything about it.
There is a greater emphasis on parents using the CMS calculator to work out the amount of child maintenance due and then making their own agreements and arrangements for payments.
In order to make this more attractive, both parents will now be charged if the payments go through the CMS. The charges that will be imposed are as follows:
What this means in practice is that if the amount due is £100, then the receiving parent will receiving £96 and the paying parent will pay £120.
There are Family Based Arrangements available to download from the Child Maintenance Service website (http://www.cmoptions.org/index.asp) for parents who want to arrange their own agreement in writing. However, both parents need to be aware that these agreements in themselves are not legally binding.
It is absolutely essential that a parent has a written record showing any payments that are made by way of child maintenance – ideally these need to be bank transfers showing the money being transferred from the paying parent to the receiving parent.
If a case is opened with the CMS and the parents subsequently reach an agreement between themselves then, if the case is not closed, the paying parent may subsequently be made to pay again unless they can prove that they have already made the payments.
In this post I have highlighted just a few of the changes that have been made however, from just this small selection we can see that these changes are neither minimal nor straightforward.
Perhaps this explains why I am left with an overall sense of disappointment. Over the years there have been a number of reforms to the way in which child maintenance has been dealt with and I had hoped that with these changes there was a real opportunity for lessons to have been learnt from the past so that improvements could be made.
Instead, it feels like an opportunity has been missed and that the overwhelming consideration when these reforms were drafted was to ensure cost savings to benefit the government. The result of this is that a system has emerged that is complicated, difficult to understand and risks failing those who are most vulnerable.
My ex partner has a ltd company and takes a minimum wage and the rest in dividend. How do I go about having his dividend into account ? what information do I need ? and how do I apply ?
Thank you for your comment. May I refer you to the Gov.uk website for further information regarding your circumstances.
How is it considered “fair” that existing CSA cases are moving from assessments based on a nett income are changing to a gross one?
Why is taxable income included?This is increasing payments dramatically for many people overnight.
Thank you for your comment. The new system was introduced by the Government. My suspicion is that it is designed to try and shift people away from using the CMS to enforce the collection and payment of monies. As to the fairness or otherwise of the new system I am afraid I cannot comment.
With a new child maintenance case and dividends, how does this work. As mine is a new case will they look at at previous year or will they get to the end of my first year and then check my tax returns. My dividends can vary and some years I get none
Dear Adrian. Thank you for your two comments. My understanding is that the CMS will look at the information that has been filed with HMRC. The effect of this is that the Child Maintenance calculation will always be based upon out of date information.
In terms of dividend income, as I mentioned in my blog post, this does not appear to be automatically taken into account. Therefore, your ex-partner would need to make an application to vary the assessment in order to include this. If they did then I believe that the revised assessment would be based upon the information that HMRC have at the time i.e. the dividend income that you received for the last financial year.
How can that be correct as dividends can vary so much. Surely the first year needs to run and it would show up on that years tax returns at the end of that financial year. How can they say for example you had a 10k dividend in 2016-2017 tax year and have to contribute from that. But in 2016-2017 tax year you do not receive a dividend?
Thank you for your comment. As you will appreciate, I do not set the rules regarding Child Maintenance and have simply provided my understanding of how these operate. If you wish to explore this further then I would suggest that you contact the Child Maintenance Service directly. You may also wish to consider having a look at the Child Maintenance Options website which contains further information regarding this. I hope this helps.
I’m a new child maintenance case, I got now doubt my ex will request a variation. If so will my case run for a year then look at my tax return or will they estimate it. My dividend vary and some years I get none. So wondered how it worked
I own a ltd company and have been paying direct pay to my ex for my two children for the last 4 years.
I have had a limited company for just under 2 years.
Now I have received the additional income variation demand from the CMS, for which I have now declared my 16/17 self assessment submitted to hmrc showing the dividends I have received.
Now I expect to be sent a hefy bill for lack of payment of maintenance due to the dividends, even though I have been fully upfront and declared everything the CMS asks for.
Whether people like it or not LTD companies are a huge thing in the uk for sole traders and tradespersons who pay maintenance for the children.
I have always responded to the CMS with what ever I am asked.
so what would be the likely outcome now I have submitted my tax return? a hefty bill and back payments?
Thanks for your comment Martin. The CMS usually initially calculates child maintenance on salary but the resident parent is entitled to a variation if the non-resident parent receives dividend income. Of course this cannot be assessed until the dividends have been paid and declared. You should assume that you will pay child maintenance on all income, regardless of the timing and mechanism of payment.