Child benefit reforms will push 320,000 families over 50% tax rate

For families with one adult earning over £50,000, child benefit will have to be returned through higher tax payments

Nearly 320,000 families are to face a marginal income tax rate of more than 50% as a consequence of child benefit being withdrawn from individuals earning in excess of £50,000, the Institute of Fiscal Studies has suggested.

From 7 January families will still be able to receive child benefit, but those with one or more partners earning £50,000 or more will be expected to repay some of the money through a tax charge, levied when tax returns are completed.

The IFS warns that the reforms will create administrative complexities and bring incoherence to the welfare system by providing some child support on the basis of individual income and other funds on the basis of household income.

The changes to child benefit will save the government an estimated £1.5bn in 2013-14. Child benefit is being withdrawn on a tapered basis, starting at the £50,000 income level, with individuals earning £60,000 or more getting nothing. The rate of withdrawal is linked to the number of children in receipt of benefit.

The IFS says: "The marginal tax rate for those earning £50,000-£60,000 is increased by about 11 percentage points for the first child and by an additional seven percentage points for each subsequent one. So, for example, while about 320,000 people will find that their marginal income tax rate increases to more than 50%, about 40,000 of them – those with three or more children – will find that it jumps to at least 65%."

The economic thinktank also says the government has introduced a contradictory parallel structure of child support, with child benefit taxed on the basis of individual incomes, and the child credit element of universal credit being based on household income.

It warns: "We already have the child tax credit, and soon its imminent replacement, namely the child additions within universal credit. The reform to child benefit will mean that we have two systems of income-related support for children.

"But the relationship to income will be completely different in each case: based on family income in one, and the [earnings] of the highest-income family member in the other; withdrawn at different rates as income rises; and the withdrawal starting at very different income levels."

It adds that, as the government introduces a means test via universal credit, ministers are "introducing a new and separate means test for child benefit, which will work in a completely different way, as well as making the seventh existing means-tested benefit – council tax benefit – much more complicated by asking every local authority in England to design its own scheme; it is unclear whether the net effect of all this will be to improve the welfare system".

The IFS also warns of administrative complexities, including the need for up to 500,000 more individuals to fill in self-assessment income tax forms, according to HMRC. Overall the reforms will affect about 820,000 families in which at least one adult has a taxable income exceeding £60,000 a year, who stand to lose all child benefit. A further 320,000 families in which the highest earning adult has £50,000-£60,000 would have some child benefit clawed back. The remaining 85 % of families would be unaffected for now.

The IFS also makes the now familiar critique that the government plans create anomalies, since a two-earner couple with taxable income of £100,000 split equally would retain all child benefit, but a single-earner couple or lone parent, with taxable income of £60,000, would lose all of it.

It claims the reform will push individuals to reduce their taxable income by, for example, working less or contributing more to a private pension. Chris Leslie, the shadow Treasury minister, said the IFS analysis highlighted the "massive complexity of this unfair policy".

He added: "Following the news this week that thousands of parents affected may not even be aware of the changes, it's becoming increasingly clear that David Cameron and George Osborne failed to think through how this policy would work in practice.

"As well as being an administrative nightmare, these changes are also unfair. How can it be right that single-earner families on £50,000 will have their child benefit cut while some couples earning as much as £100,000 keep all of theirs, and people earning over £150,000 get a tax cut in April?"

The Treasury said: "The IFS proposed abolishing child benefit completely and subsuming it into the tax credit system. We disagreed with this approach.Under our proposals, 85% of the population will continue to receive child benefit as they do now. Ninety per cent will continue to gain from child benefit.

"Looking at marginal rates in this way is misleading, as the charge simply withdraws some or all of the money that has been paid in child benefit - no one will be taxed more than the benefit they receive.

"Withdrawing child benefit on the basis of the combined family income would require intrusive means-testing of all eight million households getting child benefit. The way we are doing it is simpler for the vast majority of families and significantly removes the potential cliff edge effect of the change."


Patrick Wintour, political editor

The GuardianTramp

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