Child benefit: Why the changes could mean you pay tax at 65%

Posted on January 7th, 2013 | Categories - News

Child benefit: Why the changes could mean you pay tax at 65%Child benefit is means tested from today, with households, where one person earns above £60,000, losing the benefit completely and a partial withdrawal where there is one earner with income of between £50,000 and £60,000.

HMRC has predicted that over one million families will be affected with around 700,000 losing their child benefit completely. The average cost to a family is expected to be around £1,300 per year; however a leading think tank has predicted that over time more families will lose their child benefit.

The Institute for Fiscal Studies (IFS) believes that the percentage of families who will lose some or all of their child benefit will rise in years to come, because the thresholds of £50,000 and £60,000 are fixed and will not increase annually. Therefore, as people’s wages rise, they will move ever closer to the fixed thresholds and run the risk of being caught by the new rules.

Read our latest Q & A: Everything you need to know about the changes to child benefit

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Robert Joyce from the IFS said: “The number who will lose at least some child benefit will just increase indefinitely as you go further and further into the future.”

65% tax rate

The IFS has also produced figures to highlight the true cost to families of having child benefit withdrawn.

The IFS has calculated that up to 40,000 people, who have three children or more, will effectively pay a 65% rate of tax on earnings between £50,000 and £60,000, because of the way child benefit is being withdrawn.

The IFS said: “The marginal tax rate for those earning £50,000 – £60,000 is increased by about 11 percentage points for the first child and by an additional seven percentage points for each subsequent one. So, for example, while about 320,000 people will find that their marginal income tax rate increases to more than 50%, about 40,000 of them, those with three or more children, will find that it jumps to at least 65%”

Criticism of the new system

Whilst the IFS believes that the new system will save around £1.5 billion in the 2013/14 tax year, the changes have come in for criticism from many financial experts because of the way child benefit will be clawed back, with the IFS highlighting “administrative complexities”.

Unless people opt out of receiving it, child benefit will continue to be paid to all and then clawed back through the payment of a High Income Child Benefit Charge. This system will mean around 500,000 more people each year will have to complete self-assessment tax returns, causing further strain on HMRC.

There is also concern, and in some quarters anger, that a family with two people earning up to £50,000 are likely to continue to receive their child benefit, but a family where one person earns £60,000 will lose it entirely.
Responding to the IFS’s comments the Treasury said: “The IFS proposed abolishing child benefit completely and subsuming it into the tax credit system. We disagreed with this approach.”

“Under our proposals, 85% of the population will continue to receive child benefit as they do now, 90% will continue to gain from child benefit.”

“The top 15% of higher earners will lose some or all of their child benefit, but we are having to take some difficult decisions to reduce welfare spending and it is important that those with the broadest shoulders bear the biggest burden.”

Our latest Q & A tells you everything you need to know about the changes to child benefit, you can read it by clicking here.

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