Osborne’s Child Benefits plan flops

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)

Comments
Wild Billy's picture

Why have you presented only one side of the picture?

Wild Billy | | Permalink

Whatever one may think of the merits of the policy, it seems a little odd that AWEB has (not for the first time) chosen to present only one side. Why only choose those in the media criticising the policy? What about all those people in The Sun who have backed the change?

I really do think AWEB should endeavour to provide a balanced picture if it is going to report on the media's broader reporting.

John Stokdyk's picture

Some perspective

John Stokdyk | | Permalink

This item isn't part of some "get Osborne" campaign, it merely reports that a tax issue is playing a prominent role in the week's news agenda.

So the story reports that some of the Tory papers have taken a vociferous stance against the Child Benefit proposals. We all knew about the plan because it featured prominently in the Tory manifesto, as the story reports.

I thought that members might take in interest in the way it has grown into the the week's big controversy, and the way that the anomalies Mike Warburton and John Whiting pointed out have complicated the reform proposals.

I picked up on points raised on both sides of the political spectrum and if you think that the way the story has been presented is biased, I suggest you take off your spin goggles for a few minutes and give them a good wipe.

What do they want

mikewhit | | Permalink

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.

So is the Daily Mail effectively campaigning for joint tax returns ? It would render the sec 660a hoohah of a few years ago irrelevant.

Unworkable reforms?

leon0001 | | Permalink

 

Does “two income household” refer to tax rules – i.e. married/civil partners – or benefits rules – living together as married?

 

How is this going to be enforced?

 

What about multiple jobs, self employments, variable incomes and the like? Will it have to be dealt with in the same way as tax credits?

 

Whatever the motives, a universal benefit is much easier to administer.

 

Don’t forget that Child Benefit was introduced in 1978/79 to replace income tax child allowance.

johnjenkins's picture

Child benefit

johnjenkins | | Permalink

The main point which George should have made was that chid benefit shouldn't have been given to the higher rate tax payers in the first place.

However what does need to be looked at is the amount at which we pay higher rates. To me £50k seems a reasonable figure. Then it should be reviewed every 5 years. 

It just complicates matters again

pauljohnston | | Permalink

So how are the Govt hoping to enforce this - not another family credit pigs ear.  In the past all children get now only basic rate taxpayers.  More self assessment.

To be fairer half the allowance be paid to mum and half to dad.  Ok then what happens when mum lives alone and during the year gets a new higher rate partner who leaves before he has lived with her for 12 months.

I despair.  Once again a Govt makes changes without thinking the costs thru. 

This is effectively a tax on higher rate income faimilies having children.  I would have thought there would be better ways of raising £1bn.

 

Child benefit

Silverwhitewhiskers | | Permalink

Surely the point every one is missing is that this is a benefit payable for a child. Why should a child of a higher rate taxpayer be discriminated against  just because his mum or dad earns well.

Or am I the only one who actually puts this benefit saving for School trips, etc

Is this actually legal to discriminate in this way ( EU ?)    

B Adder's picture

Good point but

B Adder | | Permalink

surely the real question is - why do we pay people to have children ?

 

johnjenkins's picture

child benefit

johnjenkins | | Permalink

OK, so why should child benefit be paid at all?????????????

Come to that why should there be tax relief for pension payments?????????

All benefits etc can be done through tax thresholds then everybody IS treated the same, except single stay at home mums.

how about just getting rid of the benefit all together...

justsotax | | Permalink

saves discriminating against anyone that way...and will get back signifcantly more than 1bn....

Alternatively why not issue the benefit in vouchers (for various 'child' products) - perhaps this would ensure that the vast majority of the money would be spent on the child (which i suspect is not always the case currently and perhaps partly why this step has been taken).

What does surprise me is that there has been a little less said about the 26k max limit for benefits....thats effectively 26k net of tax...perhaps those HR earners and the daily papers should ask why so high (I daren't ask what some people are entitled to currently).  Now compare that to the single parent who earns 45k but needs child care provision/pay mortgage etc etc etc...if you want to talk about fair I think this should be a starting point.

 

 

 

 

Child benefit

Silverwhitewhiskers | | Permalink

Surely the best system would be to issue the benefit as a voucher to assist in paying for school clothes, trips, NHS glasses etc. Not Lager , Cigarettes ..............

 

 

 

   

@justsotax

pauljohnston | | Permalink

I feel you have written what many are thinking.  There are may working couples who earn less than £26000 net and the only benefit is the Child Benefit.  

This maybe their choice but why should a stay at home family have the same income for not working?

As usual the Govt have not thought this thru.  A man eanring £26k net will not have the whole amount to spend on himself and his family.  It costs money to go to work.  Clothes and shoes that would not normally be needed.  Travel Costs, a daily 20 mile train commute each way can cost £3k per annum.  This doubles up if both parents work (and they may have childcare costs too)

Whilst I think that a cap is essential it must make going to work more beneficial that living off benefits.  Poverty is erradicated when everyone works and not by state handouts.

cymraeg_draig's picture

Free targetting

cymraeg_draig | | Permalink

I'm in the "get rid of it all together" camp.

Why are we paying people to breed?  Surely we could abolish family allowance all together, and make a suitable increase to working families tax credit/unemployment benefits to compensate.  That way it would become a targetted benefir received only by those who need it, without any extra administrative cost at all.

Also of course, why the hell are we paying choild benefit to east europeans who have never paid into our system, start working here, and immediately get child benefit for kids still in Poland or wherever.

Isnt it time that no one was allowed to take out of the system until they had paid into it for at least, say, 10 years?

B Adder's picture

Here here

B Adder | | Permalink

Spot-on  Cymry

You can come dine with me !

Oh, Oh here we go again!

Vaughan Blake | | Permalink

So is the initial benefit payment to be given on a provisional basis and then clawed back if the income is too high?

Or nil given initially and then amended if income falls below the threshold.

Sounds very familiar!  What a nightmare in waiting.

I suggest that the scheme reverts to the old child allowance done via PAYE (OK I know!) and/or the tax return.  Relief could then disappear at a set level.  I realise the idea why this changed was that payments should go directly to Mum and not via Dad who would fritter it away down the pub.  It is however 2010 and not 1950!

Did JW really say that Independent Taxation was introduced in 1997?  Or was that a typo?

Is it just me or do others see irony in compensating those who lose the benefit?

Where does WFTC fit in to all this?  Everyone seems to be strangely silent on this.  Lets try some joined up thinking Mr O!

Deja vu

mikewhit | | Permalink

compensating those who lose the benefit

Reminds me of Brown's attempted damage limitation when he removed the £10k income tax band ...

You'd have thought the Tories would have learnt from Labour's mistakes, and also not to dance to DM and DT indignation ...

Wild Billy's picture

John

Wild Billy | | Permalink

This item isn't part of some "get Osborne" campaign, it merely reports that a tax issue is playing a prominent role in the week's news agenda...

So the story reports that some of the Tory papers have taken a vociferous stance against the Child Benefit proposals...

With respect, the article calls the policy a "flop" and reports both Tory and more left-leaning papers as being critical of the policy. I do not think that is an accurate reflection of the reporting, given there is at least one paper- perhaps the biggest selling paper in the country- that shows there is significant support for the policy. I struggle to see you can say that "it merely reports that a tax issue is playing a prominent role in the week's new agenda" when you use the word flop in the headline and choose to only quote negative press. That is giving it an editorial slant based on a misrepresentation No-one is arguing AWEB members might not find it interesting. We clearly do. That isn't, as I think you must know, the point I am making.

I picked up on points raised on both sides of the political spectrum and if you think that the way the story has been presented is biased, I suggest you take off your spin goggles for a few minutes and give them a good wipe.

I do take slight offense at your suggestion that I am wearing some spin goggles. That for lots of reasons is a silly statement to make. But, again, I suspect you know that.

John Stokdyk's picture

Comments from PKF's Andrew Penman

John Stokdyk | | Permalink

PKF director of private client tax services Andrew Penman commented that the Child Benefit proposals could pave the way to a fairer approach, particularly following the Prime Minister's suggestion that benefit losses for some families with stay-at-home parents could be partly offset by allowing the personal tax allowance to be transferred between spouses.

“The personal allowance of a non-working spouse or partner cannot currently be transferred to a family’s main breadwinner. For families in this situation who have the capital to do it, it clearly makes sense to arrange investment assets so that income is received by the non-working spouse or partner. For example, business owners might gift shares to a spouse on which dividends can be paid. But other families where the main earner is an employee just lose out. The tax system would be much fairer if the personal allowance could simply be transferred to the working spouse or partner through their tax code – even if this relaxation only gave the transferee tax relief at basic rate, to keep down the cost to the Treasury,” he said.
 
“This seems to be just the start of a long process. I would not be too surprised if the government eventually gives in to public pressure for ‘fairness’ by moving child benefit to full means testing. HMRC already administers the means tested tax credits system so applying this to child benefit may be possible by 2013. It is not entirely unthinkable that the two may in this timescale be fully integrated. But if we end up with HMRC being used as the clearing house to calculate and pay out all means tested state benefits, there are bound to be practical problems – we all know HMRC’s record when it comes to IT systems.
 
“The cuts to child benefit may initially have been sold as a way to reduce the government deficit, but if all they actually deliver is savings to fund a system of transferrable personal allowances for families, at least that would produce a fairer tax system.”
 
– ends –
 

cymraeg_draig's picture

AN EXAMPLE

cymraeg_draig | | Permalink

Lets look at a real life example -

1) Husband & wife - no children - wife has MS & needs someone with her 24/7 - husband works from home (sub-contract bookkeeper) to allow him to care for his wife (thus saving "the state" a lot of money).

2) Couple a few doors away - both working - 4 children.  Receive family allowance & working families tax credit, taxpayer pays for childrens education, 6 of them using NHS instead of 2, etc.

How can anyone possibly justify the fact that family 1 pays taxes that are then handed out to family 2 ?

 

Theory is great

pauljohnston | | Permalink

but we all know that the tax credit scheme is expensive to run, inefficient partly by design and leaks money.  So why would you want to burden it more.

The main problem with all ideas that have been mooted by Osbourne and the latest offering from Jon are that they are very inefficient.  That means that less tax is saved when taking into account costs and losses and thus a greater burden falls on ordinary tax payers who do not benefit anymore and that is not fair.

Why oh why can policitians think with all of there brains rather than  part.  Everyone knows the cheaper it is to collect tax the less that has to be collected.

HM Revenue & Customs are having real problems now, the number of staff are going to be reduced and the policitians are putting in place a more complex scheme.

Come on Mr Cameron start getting your politicians talking to those who have to help with the collection of those taxes (eg the Accounting Community) about ways to do it more efficiently

John Stokdyk's picture

Response to editorial points raised

John Stokdyk | | Permalink

@Vaughn Blake - I transcribed John Whiting's comment about independent taxation starting in 1997 from the Today radio interview, so if it's a mistake, it's either his or mine. I will try to confirm the statement in the next day or so (but things are a bit frantic around here with preparations for tonight's Software Satisfaction Awards dinner). I wasn't covering tax back in '97 - when did they introduce the separate treatment for spouse's income? [Update: Having checked the facts, I am the culpable one on this point. Article has been corrected]

@Wild Billy - I was rather pleased by the phrase "spin goggles" and it might be a term one applies to people who pour over all the papers and media outlets assessing the different angles that are presented on a story. I'm sorry if I offended you by pointing it in your direction. As it happens, I didn't consult the Sun's coverage, if that's the paper to which you refer, but thought the Mail, Telegraph and Guardian presented a representative sample. I wanted to get the story on the site quickly to give members an opportunity to put forward their thoughts on the issue, which they have done.

"Flop" is a good, short headline word that grabs readers' attention. Given the negative response that greeted the chancellor's statement on Monday, I feel its use was justified for this item.

As one of those likely to be hit by this

Peter Cane | | Permalink

Whilst I am broadly in agreement with the government's need for spending cuts, I have a few gripes:

1) How can it be fair that my wife and I would lose child benefit because I am a higher rate taxpayer, but where a husband and wife both earn £35k, they can still claim it?

2) As it is the mother who claims, the claim is in my wife's name. Surely under independent taxation, my income is nothing to do with my wife. Why should she lose child benefit, based on my income?

3) Imagine someone earning £500 below the higher rate threshold. His employer gives him a pay rise of £600, taking him into higher rate. Unfortunately, he now stands to be worse off by several hundred pounds and will be begging his employer not to give him the pay rise. Sorry, but that's crazy.

Why not bring the tax credit rules into play here, ie base it on joint household income and have the benefit tapered away. Alternatively, why not just tax the child benefit? That would be more sensible anyway .

Finally, I do hope that all those posters on here saying that child benefit is wrong have never advised their clients to claim child tax credits.

EDIT: slightly edited version

complications

oldersimon | | Permalink

We have independent taxation (from 1979, I believe). So what is the process ?

Child benefit is paid to the wife. So to enforce this you have to ask her if either she or her husband pays HR tax.  She can quite reasonably respond that she doesn't and she doesn't know whether he does. His tax records are not accessible from hers (and HMRC may have to watch data protection here). So what happens next ?

It looks like a bureaucratic nightmare to me.

cymraeg_draig's picture

"All" ????????

cymraeg_draig | | Permalink

Why oh why can policitians think with all of there brains rather than  part. 

 

Posted by pauljohnston on Thu, 07/10/2010 - 09:33

 

Did you actually use the term "ALL" when referring to MP's brains ?

 

Very Poor Article

thomas34 | | Permalink

Had the headline said "Osborne's child benefits plan flops with the Daily Mail", the article would have just passed muster. As far as I can see Mike Warburton and John Whiting haven't criticised the plan but merely pointed out possible anomalies. So the plan has flopped because of the Daily Mail's opposition.

Any cliff edge tax rule will throw up winners and losers. A person turning over £69,000 per year will be at an advantage against the VAT registered trader turning over £71,000 per year. Personally I'd abolish the benefit altogether with the proper forewarning or alternatively make the payments taxable - something which I believe was considered but ditched because of the associated administration costs.

 

B Adder's picture

@ Peter Cane

B Adder | | Permalink

The law may be an ass

but I still abide by the rules and advise my clients accordingly..... that's my job

This is my personal opinion- we have a tax and benefit system totally unfit for purpose -As we are so strapped for cash what better time for  a 'root & branch' review - 

I am not in agreement tax payers should make payment to people to have children ?

 

 

Fair comment B Adder

Peter Cane | | Permalink

But why should taxpayers be expected to fund anything at all then?

I didn't ask the government to introduce child benefit. But just as you will advise your clients to claim child tax credit because it's there, so I am (or at least my wife is) entitled to claim child benefit.

There are many things that we can all say taxpayers shouldn't fund, but how far would your "root and branch" review go?

Maybe scrap state pension for all those who've been higher rate taxpayers in 75% of their contributory years? Yes, I know it's supposed to be contributory. So scrap NI and let everyone make their own pension arrangements without the government having to spend taxpayers money to administer and pay it out. Might not be too popular though, but if a "root and branch" review is needed, why not?

EDIT: The above comment re state pension was purely tongue in cheek & not meant to be taken seriously

Independent Taxation

Vaughan Blake | | Permalink

For the record Independent Taxation was introduced WEF 6 April 1990. (I suddenly feel very old!)

As usual with tax you can either have fairness or alternatively simplicity.  These are mutually exclusive and twas always thus.

 

 

Scrap the child benefit altogether then ...

bigdave1971 | | Permalink

Why not scrap the child benefit and then increase the child tax credits to ensure those who need it (and having already been means tested) still get the same amount just under another name.

Those that don't qualify for child tax credits shouldn't need the child benefit either.

Think of the savings from not having to administer the child benefit any more.

 

 

Fairness

Silverwhitewhiskers | | Permalink

Lets get back to basics

If you are all talking about fairness

Please someone explain why those that put most into the pot take the least out. How is that Fair again ?  

Its not about getting things out, is it?

bigdave1971 | | Permalink

The point of the benefits system is surely to help those who are unable to make enough money to make ends meet.

Those on higher income can afford to pay the most tax and don't need help so they don't need to get anything out.

Those on middle income pay less tax and should get some help if they need it ... for example when bringing up young children.

Those on low income or no income can't afford to pay any tax and need more help, possibly in the longer term.

How you distribute the benefits and what you call the hand outs is a secondary issue but everyone should get the help when they "need" it and have the chance to be able to become a higher earner be happy to pay the higher tax rates when they get there.

 

 

Means Tested State Pension

Vaughan Blake | | Permalink

At the risk of sounding very old indeed I rememeber when the state pension was means tested.

I seem to remember that the claw back only applied in respect of earned income and only applied to age 70.

I think this applied to around 1985 ish.  Not sure when it started.  Maybe there is someone out there even older than me who knows the answer!

Mr O has the perfect opportunity to overhaul the benefit system and integrate all the benefits into one system (Child tax credit and child benefits, why both?).  I am surprised that he has not derided WFTC as the wastefull fiasco it is.  There would be plenty political "Brownie" points to be gained there. 

Option to be taxed jointly?

malisajama | | Permalink

The idea of Independent Taxation was seductive...

Then Gordon introduced Tax Credits based on household income...

Now George wants to limit Child Benefit based on each parent's income...

All part of my fiendish plan to destroy the country!!!

=========================================================

Some other countries have revenue systems that tax individuals, but allow a married/CP couple to elect to be taxed jointly (or as a household). Those that choose to be taxed jointly have higher tax-free allowances and can claim other 'family' benefits. Those that are taxed as individuals have not and cannot (unless they are a single parent responsible for a child). Typically, if each spouse/partner is earning a decent wage then it is better to be taxed individually. On the other hand, couples with children (and one parent is not in a well-paid job) are better off being taxed jointly. Generally, it works pretty well.

On the plus side, this tax regime actually supports families where one parent stays at home to look after the children, which is the exact opposite of what George is proposing!

Why, oh why do we have to make everything so inflexible in this country???