Mark Willis explains how the rules designed to restrict child benefit for ‘high earners’ are meant to work.
Not content with freezing child benefit for three years, restricting maternity grants to the first child and cutting tax credits, the government’s policy of targeting children to pay for the banking crisis continues, with the introduction of a new ‘child tax’ on a sliding scale for people earning over £50,000. This was announced in the 2012 Budget, after a slight revision of the original proposal to withdraw child benefit in full from higher rate taxpayers. At first glance, this policy may not seem likely to have a direct impact on child poverty, but the undermining of this simple, universal benefit will have lasting implications for the role of the state in supporting children.
The government is not withdrawing child benefit. Entitlement to child benefit is unaffected and can still be claimed and paid in full as normal, regardless of income, to anyone responsible for a child or qualifying young person, subject to residence and immigration status. The Finance Act 2012, which received Royal Assent on 17 July, makes a change to the tax system by introducing a new income tax charge on child benefit for people on higher incomes. The new tax charge only affects families where one person’s taxable annual income exceeds £50,000. It applies to individual income not joint income; so, for example, a couple who both have incomes of £40,000 will not be affected. The charge will apply to people receiving child benefit, or who live with a partner receiving child benefit. If both members of a couple earn over £50,000, the charge will apply to the higher earner only. The charge will be 1 per cent of the annual amount of child benefit received for every £100 by which income exceeds £50,000. This means the charge for people earning between £50,000 and £60,000 will vary according to income and how many children they have (see table). For people earning more than £60,000, the charge will be equal to 100 per cent of the amount of child benefit received.
The charge will only apply to child benefit payments received after 7 January 2013, and the earliest that the extra tax will be collected is during the 2013/14 tax year. People who are liable to pay the charge should be sent a tax return to complete in April 2013, an estimated half a million of whom will be going through this self-assessment process for the first time. This also marks a departure from individual taxation, as the tax return must now include partner’s child benefit income. HMRC is sending out millions of letters to people who may be affected.
The claimant can choose to stop receiving child benefit instead of paying the charge, but will retain an underlying entitlement. If it turns out that the claimant or partner was not actually liable to pay the charge (ie, does not actually earn over £50,000), the election can be revoked within two years of the end of the tax year, and child benefit reinstated. HMRC has produced 15 new pages on its website to explain the policy and introduced a new online facility for people to stop and restart their child benefit claims.1">www.hmrc.gov.uk/childbenefitcharge/index.htm
The child benefit claim form and notes have also been amended to refer to the new charge. A new part 4 (only to be answered if the claimant or partner has an income over £50,000) poses the question, ‘Do you want to be paid child benefit?’ Claimants are notified of the importance of continuing with a claim for child benefit in all cases, even if they do not want to be paid, to protect the claimant’s national insurance record for state pension. Entitlement to child benefit also ensures the child is automatically issued with a national insurance number before her/his 16th birthday. Guardian’s allowance is not directly affected, as the income tax charge only applies to child benefit, so people on higher incomes can still benefit from guardian’s allowance if they are responsible for a child whose parent or parents have died. However, it is necessary to remain entitled to child benefit, even if it is not paid, in order to be entitled to guardian’s allowance.
The concern for advisers is that many families may stop claiming child benefit when they do not need to, and this policy will add to hardship when income fluctuates or when couples separate and create an added financial strain on relationships. A vitally important feature of child benefit is that it is paid directly to the main carer for the children, overwhelmingly women, and research has shown it is spent on children.2">www.savechildbenefit.org.uk
This policy also undermines the role of the state in recognising the value to society of bringing up children. An extra allowance for children has been a feature of the tax or social security system since 1909. Every other European country, except Italy, offers a universal child benefit or a child tax allowance to all children.3 The effect of this, along with other cuts, is that people are made to feel guilty about receiving a benefit which was once a proud pillar of the welfare state, and that children are a burden, rather than everyone’s future. The rhetoric of ‘all in this together’ has long since been exposed. The majority of high earners, who do not have children, are not affected, and those with earnings over £150k, few of whom have children living with them, have even had their tax cut.
This policy is complex, time consuming and costly and, like taking candy from a baby, may well end in tears.
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