Implementing Child Benefit changes

As I’ve mentioned before, I’m not a fan of the changes to Child Benefits that are coming into effect later this month. The proposal is essentially that if anyone – in a household that currently get Child Benefits – has a taxable income above £50000, they will lose some or all of their Child Benefits. They lose everything if their taxable income exceeds £60000, and part of it (proportionally) if they have a taxable income between £50000 and £60000.

There are really two reasons why I don’t like this change. One is simply that I don’t see why a couple (or someone who is single) with children shouldn’t get some benefit relative to their peers. If they’re high earners, they may not need it but should be paying a lot of tax anyway (this may not be true, but that’s more a problem with the tax system than with the Child Benefit system). The other issue is that it depends only on individual income, not on household income. A family with one earner who has a taxable income of £60000 loses all of their child benefit, while a household with two earners, each of whom have taxable incomes of £50000, will keep all their child benefit. This seems completely unfair. Some households that keep their Child Benefits will have higher total incomes than some who lose it all. I think I will end up in the former category, so maybe I shouldn’t care, but I still think it is wrong.

When one of the government ministers was asked whether or not he thought this was fair, he responded by essentially saying that their intention was to keep things as simple as possible and wanted to avoid people filling out more forms. I can just imagine the single parent with a taxable income of £55000 saying “I might have lost £1000 of Child Benefit, but thank goodness I didn’t have to fill out another blasted form!”

The Institute for Fiscal Studies (IFS) released a report a few days ago suggesting that these changes to the Child Benefit was effectively introducing a 50% or higher marginal tax rate for those – with children – who are earning between £50000 and £60000 per year. They produced the figure below which suggests that for families with one child the marginal rate would be 50%, while for a family with 4 children it would be above 70%.

Marginal tax rates, including the effects of the new Child Benefit changes (taken from the Institute for Fiscal Studies).

Marginal tax rates, including the effects of the new Child Benefit changes (taken from the Institute for Fiscal Studies).

Although I normally quite like what the IFS does, my first thought was that this was just nonsensical. Although I thought I could see how they could equate losing some child benefit to an effective increased tax rate, I thought this comparison was just wrong. How can not getting some money be equated to a higher tax rate? However, it turns out that they are exactly correct. I started looking into this today. If you have a taxable income between £50000 and £60000 per year and want to keep getting child benefits, you have to register with HMRC (Revenues and Customs). They then keep paying you the full child benefit, but increase your tax in order to recover the bit you are no longer entitled to get.

If you have two children, your annual Child Benefit is £1752. If you have a taxable income of £55000, you will only be entitled to half of this. In you have no children you will pay 40% tax on the money you earn over £50000. Someone with a taxable income of £55000 would therefore pay £2000 tax on the £5000 over £50000. Someone with a taxable income of £55000 who has 2 children will also have to pay back £876 of their child benefit. This will be done by increasing the tax on the amount over £50000 from £2000 to £2876. This is an effective marginal rate of 57.5%. It doesn’t actually matter how much you earn over £50000 (and less than £6000); if you have two children it is 57.5% of your income between £50000 and £60000. For 3 children this increases to 65% and for 4 children it increases to over 70%.

I appreciate that the net effect is essentially the same as simply not getting some of the child benefit, but this seems like a crazy way of doing this. They really have implemented a marginal tax rate in excess of 50% for those with children and with taxable incomes between £50000 and £60000. Even if it does have the same net effect, I think this is going to be much more annoying than simply getting less child benefits. Fundamentally, someone with children could be paying more tax than someone without. You’re literally paying tax for having children.

When I also think of how this government has implemented the student loans I’m amazed. They’ve instituted a student loan scheme in which the repayments will be very like a graduate tax but which they’re insisting isn’t a tax. They’ve now made an explicit change to the tax system but which isn’t really a tax, it’s just recovering an overpayment of Child Benefits. Amazing. They’ve introduced something that isn’t a tax that is and something else that is a tax but isn’t. I’m confused.

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