Tax cuts ‘for families’ leave child benefit clawback untouched – for now

The Chancellor announced a series of tax cuts this morning which he said would support families in the UK.¹ But one heavily criticised tax policy – the high income child benefit charge – was left alone. In particular, the £50,000 income threshold for the charge remains unchanged, as it has done for nearly ten years, bringing hundreds of thousands more families into scope. LITRG hopes the Chancellor’s plans for a review of the tax system present an opportunity to look at the charge.

The Chancellor announced that the government will conduct a review to make the tax system “simpler” and “better for families”.² This is widely expected to focus on the ‘sharing’ of personal allowances within a household. LITRG urges the government to include the high income child benefit charge within the review, consulting with stakeholders and addressing the fact that the charge is operating beyond its original policy objective to only affect higher-rate taxpayers. This should consider both an uprating of the £50,000 threshold to at least £60,000, and also the exceptional complexity of the policy which makes it hard both for HMRC to administer and for taxpayers to understand.

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. This not only causes additional administrative burdens and costs for both the taxpayer and HMRC, but a taxpayer may mistakenly assume a return is not required. A further concern of LITRG’s is that an individual earning above the threshold can be liable to the charge even though it may be their partner who claimed and received child benefit. In LITRG’s view, this is contrary to the principle of independent taxation, which is supposed to mean individuals are taxed separately on their income and capital gains without reference to their partner. A further aspect is that some taxpayers are discouraged from claiming child benefit entirely as a result of the charge, which can have consequences for the would-be claimant’s state pension record.³

Tom Henderson, Technical Officer for LITRG, said:

“For many years, LITRG has been calling for the high income child benefit charge to be reviewed.⁴ Despite its name, the charge can have consequences for those who do not consider themselves to be on a high income, because the measure used to determine liability ignores factors such as whether the household has a single earner, housing costs, or family size. This means that families can be caught by the charge despite having very little disposable income, and larger families can also face high effective marginal tax rates when they are liable to the charge.⁵

“In addition, as the charge can affect unrepresented taxpayers whose only source of income is already fully taxed under PAYE, there is a significant lack of awareness among those affected – especially those who become affected as a result of wage increases. This has led to some taxpayers failing to notify HMRC of their liability to the charge and, consequently, receiving backdated assessments of unaffordable sums, including late notification penalties.

“Given recent rises in inflation, more and more families are being affected by the charge who were never meant to be in scope, because wage increases have brought them over the threshold. Also, basic-rate taxpayers were brought within scope of the charge for the first time from 6 April 2021. Yet the government continues to claim that the current threshold ‘remains the best option’.⁶ It is disappointing that today’s announcements were silent on specific reforms to the policy, especially given that the tax cuts in the Chancellor’s speech were framed as being ultimately for the benefit of families. However, the upcoming review gives the government an opportunity to review both the threshold of the charge and the complexity of its administration. We urge it to do so.”

Notes for editors

1. See HM Treasury’s policy paper The Growth Plan 2022, published today. The Chancellor’s speech highlighted throughout how the tax cuts ultimately supported families.
2. Paragraph 3.7, The Growth Plan 2022
3. 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 charge, but some taxpayers may not make the claim in the first place.
4. See LITRG press releases: Raise income threshold for child benefit clawback to £60,000 (8 October 2021), Concern as high income child benefit charge hits basic rate taxpayers (21 January 2021), and its 2021 Budget Representation.
5. For 2022/23, child benefit is paid at a rate of £21.80 a week for the eldest child and £14.45 a week for each additional child. For this year, the annual entitlement for two children is £1,885.00. 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 (from 6 November 2022): a total of £60. For three children, the weekly entitlement is £50.70, or £2,636.40 for 52 weeks. For an additional £100 of income within the £50,000 to £60,000 range, the figures are £26 of HICBC, £40 of tax and £2 of NIC (from 6 November 2022): a total of £68.
   To address the high marginal tax rates in these situations, LITRG also calls for an extension to the point at which child benefit is fully withdrawn – from £60,000 to at least £75,000.
6. See Treasury written question – Child Benefit: Inflation (answered on 22 September 2022).