THE GOVERNMENT yesterday acknowledged today’s child benefit changes are not perfect, but insisted removing the handouts for high earners is still a step in the right direction.
Any household with at least one person earning over £50,000 will lose some of its child benefit, with those on more than £60,000 seeing the cash stopped completely.
Critics fear many families will now face a very high marginal tax rate, and also attacked the lack of consistency as a household could have two earners both on £49,000 and still receive benefits.
The change will affect 1.1m people this year, who will lose an average of £1,300 per year, though the exact impact varies by income and by the number of children eligible for the handouts.
The phased cut-off point means that those with four children and earning between £50,000 and £60,000 face an effective marginal tax rate of over 70 per cent, according to the Institute for Fiscal Studies, hit by both the 40 per cent rate and the cut to benefits.
On top of that they will also pay national insurance on their earnings.
The IFS warned this will get worse as child benefit rises with inflation.
“Indexation of child benefit rates at two per cent per year would increase these marginal rates by a further five percentage points for a three-child family over one decade,” the IFS noted.
“To avoid this, some families with an adult on more than £60,000 would have to be allowed to retain some of their child benefit. But there are currently no provisions to do this.”
Prime Minister David Cameron hit back at the idea the changes are unfair: “This will raise £2bn a year. Now if we don’t raise that £2bn from that group of people – the better off 15 per cent in the country – we’d have to find somewhere else to take it from. So it is fair,” he told the BBC.
And he added that a means test to take into account full household income might be fairer, but it would be too costly and intrusive.
And writing for the Mail on Sunday, chancellor George Osborne also stressed the long-term gains.
“I am determined that our children should not be saddled with paying off the bills our generation has racked up,” he wrote, noting that increasing job seekers’ allowance and tax credits by only one per cent per year will save £4.6bn over the next three years.
But his Labour counterpart Ed Balls said the benefits changes hurt those striving to do well for themselves.
“Ministers claim they are targeting scroungers, but the truth is two-thirds of people being hit are in work,” he argued yesterday.
Meanwhile the Prudential warned that taxpayers with a headline income of below £50,000 could still be affected by the tax if they have rental or investment incomes that drag them over the limit. But it also said child benefit withdrawal only applies to final taxable income – so increased pensions contributions could increase the amount of child benefit received.
Q and A: What is happening to my child benefit?
Q Who is affected by this new income threshold on child benefit claims?
A Any household with at least one person earning over £50,000 will see its child benefits cut. They are phased out over the next £10,000 with nobody on over £60,000 receiving child benefit. Around 1.1m people fall into that category.
Q When will I notice the impact?
A Anyone no longer eligible can either opt out now – as at least 240,000 have done – and stop receiving the cash from today, or take it anyway and fill in a tax return next year when they know their exact income, then pay back what they owe.
Q I thought my state pension was linked to child benefit. Will I lose this if I opt out?
A No, you will not lose those national insurance contributions. Any stay at home parents get pension contributions by signing up for child benefit. But if you sign up then opt out, you still receive the national insurance payments, so will not lose out there.
Q What if I don’t know my spouse’s income?
A You can call HMRC to ask if anyone in your household is claiming, and if they are liable to be charged. Those two questions will let you know the status of your benefit, without any intrusive questions on income levels.