Child benefit: Where George got it wrong

 

Over the past week the profession has torn apart the Chancellor’s plans to change the rules for child benefit.

This article summarises the key issues and offers advice from the AccountingWEB community to help George Osborne out of the latest tax pit he’s dug himself into.

For many the Chancellor’s High Income Child Benefit Charge (HICBC) announcement last month violated all the principles the government laid down a year ago – simplification, fairness, efficiency and certainty.

Child benefit is set to be progressively withdrawn from households where someone earns at least £50,000 at the rate of 1% for every £100 above this threshold.

This has thrown up a number of anomalies, meaning that a two-income couple can earn £99,000 a year and keep all their benefit, while a single-income couple on £60,000 loses it all.

Simplicity

AccountingWEB member anthonydyer said the new measure would create “anti-simplification”, which goes against what we've been led to expect: “Didn't we all see the problems coming when Child and Working Tax Credits were put in place? Well, I see the same and worse happening now. The administrative cost of all those extra tax returns and calls to HMRC for explanation are going to cost a fortune in admin."

David Heaton of Baker Tilly said in the firm's tax brief this week that the concept of the charge is simple, but HMRC will "have to deal with week-to-week issues, such as broken marriages, temporary and semi-permanent cohabitation, children moving between separated parents, children of the same relationship living with different parents, polygamous overseas marriages, mistakes about whether a woman can elect out of receiving child benefit, and more.”

The new measures mean that two parents who each earn £50,000 keep all of their child benefit, despite how many children they have.

However Benneyworth flagged up the "very aggressive" marginal tax rates that would result in her Budget Analysis Report.

Heaton concurred, pointing out that fairness diminishes with the increasing size of the family. For a family with one child that’s a marginal tax rate of 52.6% (instead of 42%); with three children it’s 66.5%; five children 80.4%; and eight children 101.3%.

Benneyworth said: “For the next year or so in any event families with five or more children will still be getting child tax credit at £50,000. This puts the rate for five kids up a bit and the rest up by 41% in each case. Marginal rates run up to 150% with a very large family (nine or more).”

On an administrative level, Benneyworth said: “I understand that somewhere around 4.5m letters will be sent to those with income of more than £50,000 to establish how many of them live with someone in receipt of child benefit or are in receipt of child benefit themselves. That's quite a lot of letters and quite a lot of cost. Then you have to follow up the no replies - quite high I suspect. Then you have to match the records. Then you have to check who is the higher earning of the two, but using net adjusted income, which you can't do unless you bring the whole lot into Self Assessment.”

She also pledged that if the government did not relent, she would “spend a day chained to the railings outside the House of Parliament” to drive home the point.

She added: “My real concern is the damage this is going to do to the integrity of the tax system. It's not so much about whether it should or shouldn't be done, I think taxpayers will feel it is unfair because somebody is going to pay tax on some money they've never had because their partner had it, and it also means you lose confidentiality. I think there's huge damage to the integrity of the tax system.”

Further reading:

HMRC: Child Benefit: Income Tax Charge for Those on Higher Incomes

Continued...

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Comments
Wild Billy's picture

Where George got it wrong...

Wild Billy | | Permalink

... was not sticking to his guns on the original proposal that any higher rate taxpayer would not receive child benefit any longer. We moan, oh how we moan, and this does seem unworkable to me too but where were we when the original proposal was being criticised and the demands from others to listen and modify the proposal?

The uncomfortable truth is the "profession can rip apart" any proposal but it is rather less good at saying when it agrees with something or standing up for the Government when it should.

Would agree with Rebecca, include it in

justsotax | | Permalink

the tax credit claim - at least then it would not have taken much tweaking to incorporate.  Better still if people chose not to claim then the government would be better off (or at least the cost of the 'tweak' may be covered by the underclaiming of the benefit.)

 

More work for us though....shouldn't complain really......

So whats the tax saving?

pauljohnston | | Permalink

Out of an estimated taxtake of £592bn for 2012-13.  The child benefit savings are estimated at £2.2bn.  Was it worth the hassle George?

This is a real problem    2 thanks

Mallock | | Permalink

If Child Benefit is added to the Tax Credit system, it may take some of the confidentiality and practical problems out of the equation but it is still going to take Child Benefit away from a large number of needy families.

The problem with the Chancellor's initial proposals was that a family who were £1 below the higher rate threshold received Child Benefit in full whereas one with £1 more that the higher rate threshold lost the lot - for a family on the cusp of higher rate tax with only one earner, the loss of anything from just over £1,000 to an average of around £1,800 net p.a. is a serious amount of money. The changes proposed in the budget addressed some issues but as has been noted above created others.

Personally I think Child Benefit should stay for everyone but higher rate tax should be put up by whatever percentage is necessary to make it a fully costed benefit within higher rate tax payers. I would have thought somewhere around 3% would be enough. In this way all higher rate taxpayers share the cost, there are no expensive procedures to implement and no new cliff edges or cliff faces in the tax system.

Perhaps this would not be popular but I don't see why families should face a tax burden greater than others in an attempt to plug the budget deficit. We all benefit from children coming through to take jobs and be the new generation of taxpayers.

Perhaps we should just make it a taxable benefit...?    1 thanks

justsotax | | Permalink

- not perfect as there would be some planning in regarding to the lowest earner claiming the benefit/allowance - but at least that way it would recover something....but there will always be an issue.....if you haven't got kids you don't get it.....of course we also assume that the child will become a taxpayer of tomorrow.....but that is no guarantee.....

Just a thought    4 thanks

Wiganer Elaine | | Permalink

In a heavily over-populated country, not to mention the whole planet in general, maybe its time governments simply stopped paying people to have children??

 

@Elaine    1 thanks

pauljohnston | | Permalink

I agree too but feel it should be restricted to the first two births (this covers twins on first occassion or a single child followed by twins).  If this started with births after 1 April 2013.  THe cost will fall as each year a chunck of young people attain 18 years and the benefit stops at that point for them.

I dont think that taxing or withdrawing the benefit will help.  . 

lt will just mean that longerterm lower income families will have more children and those paying higher rate taxes, less.

When I was born in 1956 no benefit was paid for the first child but this was to increase the population.  NOw we need the poulation to reduce.

If we need the population to reduce ...

dwgw | | Permalink

... we'd probably do better to have fewer old people around.  We've already got huge structural issues arising from an aging population, inadequate pensions, inadequate care provision, ever-growing healthcare costs etc.  How would Elaine, Paul and the other Malthusians suggest that reducing the numbers of children might address these problems?  A shrinking younger working population surely won't help.

The government's proposals are unworkable.  Either they haven't been thought through at all or, even worse, they have but ministerial incompetence has blinded them to the consequences.  Doesn't inspire confidence either way.  

Lawyers

davidkirk | | Permalink

Has anyone asked any matrimonial lawyers what they think of the Revenue telling their clients' exes what their income is? I haven't, but I imagine that their remarks will generally be just about unprintable.

Look to the future    1 thanks

Wiganer Elaine | | Permalink

A difficult choice is a difficult choice and you can't please all of the people all of the time, to paraphrase an old saying.

Instead of trying to close down a vital area of discussion, namely over-population and its far reaching consequences for the whole of mankind, not just the UK, with a knee-jerk comment which implies that there is an easy solution to this issue - ie get rid of the "old" people - people seriously need to consider what is at stake here.

The argument that you need to maintain and/or increase population levels to support the growing numbers of the ageing population is a never ending cycle that will lead to an ever increasing population and will not do anything at all to prevent economic and social disaster in the long term.

The answer to reducing the population long term is to lower the numbers being born. Unfortunately, this will not provide a quick result for the "instant gratification" generation but means that eventually as people die naturally the population will decrease. In the short term we are in for a long, hard bumpy ride!

@dwgw

pauljohnston | | Permalink

I understand that the ratio of retired people to those working starts falling in 2050, 38 years time so Elaine and my suggestion are very workable. A reduced population would make the scarcity of housing less of a problem and reduce the preasure to concrete over parts of south of England and reduce our comsumption of all most everything.

I am looking to the future!

dwgw | | Permalink

Wiganer Elaine wrote:

Instead of trying to close down a vital area of discussion, namely over-population and its far reaching consequences for the whole of mankind, not just the UK, with a knee-jerk comment which implies that there is an easy solution to this issue - ie get rid of the "old" people - people seriously need to consider what is at stake here.

The argument that you need to maintain and/or increase population levels to support the growing numbers of the ageing population is a never ending cycle that will lead to an ever increasing population and will not do anything at all to prevent economic and social disaster in the long term.

It certainly wasn't a knee-jerk comment; I was being facetious in order to make a serious point.  The last thing I meant to imply is that the solution was easy; I was reacting to what I took to be your simplistic view that reducing the birth rate solves the problems of a perceived over-population.      

There are very serious consequences for western societies reducing the proportion of young people in their populations.  The equation isn't that simple and single countries can't expect unilateral measures to be effective irrespective of developments elsewhere.  We've barely begun to experience the pensions/health care/social care crisis that lies not too many years ahead.  If we reduce our birth rate, how will we be able to support even the most basic provision?  Increased taxation?  Withdrawal of care for old people?  Good luck getting either of those through.  Greater immigration could alleviate the problems but that brings its own political and social difficulties.

Developing world populations tend to reduce as people move away from basic subsistence.  Current economic trends show growth shifting from the developed world to Asia, Africa and Latin America.  That may be painful for us here economically but, globally, it's probably a good thing.  Longer term projections don't indicate that we have an ever-rising UK population to worry about.  I'd suggest that simplistic "reduce numbers of children" solutions aren't required in the UK and would actually be more likely to damage our society and economy in the medium and long term.