Just a few short weeks after the fuss about PAYE, tax is back on the front pages after Chancellor George Osborne unveiled his plans to withdraw the universal Child Benefit tax credits for higher rate income tax earners.
The policy was one of the main proposals in the Conservative electron manifesto and during the pre-election debates, the new deputy prime minister Nick Clegg pointed out that as an MP he qualified for the tax credits.
In his speech to the party conference on Monday, the chancellor said that from 2013 families where one parent was a higher rate taxpayer would lose the credits. The way the current Child Benefit thresholds work, that means more than £43,580 a year.
Critics – orchestrated in part by the Daily Mail – leapt on the unfairness that a two income household earning more than £87,000 would still qualify, while a single earner on £50,000 a year would not.
With the threshold for higher rate income tax dropping in 2011-12, those earning more than £42,375 would pay the 40% tax and lose out on the Child Benefits. According to Grant Thornton’s Mike Warburton, reductions in the higher rate threshold by 2015 could mean those on £38,600+ lose the credits.
Mike Warburton, of accountants Grant Thornton, has calculated nearly three million higher rate taxpayers will be hit by the child benefit axe.
Warburton told The Guardian: “One of the unfortunate side effects of increasing the single personal allowance to £10,000 is the likely decrease in the income at which people will be brought into the higher rate tax net and in many cases will lose the ability to claim child benefit.”
Office of Tax Simplification head John Whiting joined in the debate Wednesday morning, explaining to Radio 4’s Today programme, “The fairer you try to be the more complex you are.”
Since 1990* introduced taxation on individual income, there has been a political fault line between individual and joint tax that created the kinds of anomalies that are tripping up the government. “Perhaps we should have had some of that debate earlier,” he told the BBC’s Nick Robinson.
(*date corrected post-publication; see comments below)