Abolish child benefit claw-back now!by
An appeal by HMRC for employers to help employees understand their child benefit entitlements sent Rebecca Cave into an indignant rage. Why should employers be asked to do this?
Child benefit is a universal state benefit paid to all parents who make a claim (if they have the right to live in the UK). It should not have bearing on the payroll function, but it does.
The link between income tax deducted under PAYE by employers, and a benefit designed to help mothers feed their children, is a pernicious piece of law called the High Income Child Benefit Charge (HICBC). The excellent Revenue Benefits website gives a fuller explanation of the history of family allowances that preceded child benefit, which was introduced in 1977.
Back in October 2010 George Osborne (then Chancellor of the Exchequer) announced at the Conservative Party conference that Child Benefit would be withdrawn from families with a higher rate taxpayer. I believe at this stage he had no firm idea of how this would be done in practice, as the tax system and child benefit system were not linked at all, although HMRC is responsible for both.
In the 2012 Spring Budget Osborne’s bright idea had morphed from targeting all higher rate taxpayers with qualifying children, to those with income of £50,000 or more. At that time (2012/13) individuals were liable to pay 40% tax on income above £42,475 (£34,370 + personal allowance: £8,105), so the £50,000 threshold only hit those comfortably within 40% tax band.
The HICBC bizarrely came into effect from 7 January 2013 (part way through the tax year), to impose a charge equivalent to 1% of the child benefit received by the family, for every £100 of adjusted net income above £50,000. Those with income of £60,000 or more have all of their family’s child benefit clawed back by way of this extra tax charge.
Train wreck envisaged
Before the HICBC came into effect, tax professionals criticised the plans on numerous grounds including:
- It breaks the principle of independent taxation of husband and wife.
- Individuals would not be aware that they have to declare a benefit received by another person.
- It would drag taxpayers into self-assessment purely to declare and pay the HICBC.
- It unfairly penalises couples where one person earns most of the family income pushing them into higher rates, compared to those couples who have more equally balanced incomes.
- It generates very high marginal tax rates for parents.
At the Digita conference in 2012 Rebecca Benneyworth called for the HICBC to be reversed, commenting, “It is the train wreck we were expecting and it’s picking up speed. It’s going to be a disaster for us and even worse for HMRC.”
And so it came to pass.
HMRC has issued over 40,000 penalties (probably more) to parents who failed to declare the child benefit on their tax returns and thus declare their lability to pay the HICBC.
Most of the taxpayers who received such penalties claimed that they had no knowledge of the need to pay the HICBC. In 2019 HMRC agreed to cancel 6,000 penalties relating to the tax years 2012/13 to 2015/16, if the taxpayer had a reasonable excuse for failing to notify HMRC of the benefit they have not received, and they were not already within self-assessment.
Remember, HMRC is the organisation that administers and pays child benefit. But it can’t tie up the tax records of the taxpayer who is liable to pay the HICBC, with records of the recipients of child benefit. This is because those individuals are different people, and the child benefit system is not programmed to talk to the tax system – apparently.
Hits basic rate taxpayers
From 6 April 2021 the 40% tax band starts at £50,270 (£37,700 + personal allowance of £12,570), so it is no longer just “higher rate taxpayers” who pay the HICBC, but basic rate taxpayers are also caught.
The policy behind the HICBC has failed. It is taking away money from families that need that benefit.
The existence of the HICBC also discourages parents from making a claim for child benefit when their child is born. This deprives the stay-at-home parent of NI credits, which can have an adverse effect on their entitlement to the state pension.
The child may also have difficulty when entering the workforce, as they may not have a National Insurance number allocated to them.
As Sue Christensen commented on Twitter: “It’s anti-family. A disgusting mess.”
My advice to Sunak
In my pre-Budget blog, I advised the Chancellor to scrap the HICBC. I hope he listens and does one good thing before he leaves office.