‘Raise income threshold for child benefit clawback to £60,000’

In advance of the October UK Budget, the Low Incomes Tax Reform Group (LITRG) is calling for the high income child benefit charge (HICBC) threshold to rise.¹

LITRG points out that it is contrary to the original policy intent that basic rate taxpayers are now liable to the charge.² LITRG suggests that the threshold go up from £50,000 to £60,000, to take account of nearly nine years of inflation.

Tom Henderson, Technical Officer for LITRG, said:

“When the HICBC was announced in 2010, and introduced in January 2013, the Government’s policy intent was that it would only affect higher-rate taxpayers. For the 2012/13 tax year, the higher-rate threshold – the point at which an individual is liable to the higher rate of tax – was £42,475. Since then, the higher-rate threshold has risen broadly in line with inflation but the £50,000 threshold for the HICBC has remained static. The Government has so far resisted calls to up-rate the £50,000 threshold, but we believe this intransigence is untenable because the higher-rate threshold overtook it from 6 April 2021.”

Taxpayers liable to the charge must file a Self Assessment tax return, even though HMRC may already know about all of a taxpayer’s income through the PAYE system. An individual can be liable to the charge even though it was their partner who claimed child benefit, which is contrary to the principle of independent taxation (this is supposed to mean individuals are taxed separately on their income and capital gains without reference to their partner).

LITRG points out that, despite its name, the HICBC can have consequences for those who do not consider themselves to have a high income. This is because the measure used to determine liability to the charge ignores factors such as whether the household has only a single earner, housing costs or family size. This means families can be caught by the charge despite having very little disposable income. Alternatively, individuals who usually have a lower income may end up being liable to the charge because of a one-off event, such as taking money out of their pension. And as the charge can affect taxpayers whose only source of income is already fully taxed under PAYE, there is a significant lack of awareness among those affected. This has led to taxpayers receiving backdated assessments of unaffordable sums.

In its Budget representation, LITRG also calls for the point at which child benefit is fully clawed back to increase from £60,000 to £75,000. This is to address the fact that larger families can face high effective marginal tax rates when they are liable to the charge. For example, where the charge applies to withdraw a child benefit claim for two children, the taxpayer must pay £60 in tax and National Insurance for an additional £100 earned between £50,000 and £60,000. For three children, the rate increases to £67 for an additional £100 earned.³

LITRG also argues that the existence of the charge can discourage people from claiming child benefit entirely. This can have consequences for the would-be claimant’s state pension record, as they potentially miss out on National Insurance credits. LITRG urges the Government to ensure that taxpayers do not miss out on these credits where child benefit is not claimed.⁴

Tom Henderson said:

“The HICBC has been a controversial policy since its introduction. We urge the Government to carry out a review of the policy and address those areas where the charge is not meeting its original objectives.”

Notes for editors

1. www.litrg.org.uk/sites/default/files/files/210929-LITRG-2021-Autumn-Budget-Representation-HICBC.pdf

2. The HICBC is a tax charge designed to claw back child benefit where the claimant or their partner has adjusted net income in excess of £50,000. For 2021/22 to 2025/26, the higher rate threshold is frozen at £50,270. The 2010 Spending Review stated that the HICBC would only affect higher rate taxpayers: https://www.gov.uk/government/publications/spending-review-2010.

3. For 2021/22, child benefit is paid at a rate of £21.15 a week for the eldest child and £14 a week for each additional child. For a 52-week benefit year, the annual entitlement for two children is £1,827.80. This is withdrawn at a rate of one per cent for each £100 of income above the £50,000 threshold. Therefore, on an additional £100 of income within the £50,000 to £60,000 range, the partner with the higher adjusted net income in such a household suffers £18 of HICBC, £40 of tax and £2 of NIC: a total of £60. For three children, the weekly entitlement is £49.15, or £2,555.80 for 52 weeks. For an additional £100 of income within the £50,000 to £60,000 range, the figures are £25 of HICBC, £40 of tax and £2 of NIC: a total of £67. These figures will increase with the planned 1.25% rise in National Insurance contributions from 6 April 2022.

4. Child benefit claimants are entitled to National Insurance credits for up to 12 years (or potentially longer if there is more than one child in respect of whom child benefit is claimed). Claimants can opt out of receiving payments of child benefit in order to maintain entitlement to these credits while avoiding the HICBC, but some taxpayers may not make the claim in the first place.

5. Low Incomes Tax Reform Group

The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.  

The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. The CIOT’s 19,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.

Contact Hamant Verma, Senior External Relations Officer, 0207 340 2702 [email protected]