Osborne's child benefit U-turn hits middle class

THE CHANCELLOR yesterday announced sweeping benefit cuts for higher earners, as he seeks to slash the welfare bill and reduce Britain’s yawning budget deficit.

Families paying the higher 40 or 50 per cent rate of tax will no longer receive child benefit, affecting hundreds of thousands of professional Londoners.

By 2013, families with an adult that earns over £43,875 will have their child benefit withdrawn through the tax system, George Osborne said.

He added: “We still pay over a billion pounds a year in child benefit to higher rate taxpayers. Most are not the super rich, but it’s very difficult to justify taxing people on low incomes to pay for the child benefit of those earning so much more than them.”

Treasury officials say the reforms, which will affect 1.2m households, will save around £1bn a year.

But the Centre for Social Justice, a think-tank set up by welfare secretary Iain Duncan Smith, said it was “concerned” about the reforms, which penalise families with a stay-at-home mother or father. It called on the government to consider “alternative options”.

The changes will punish families that have one adult paying the higher rate of tax. For example, a two-child family with a father that earns £44,000-a-year and a stay-at-home mother will lose £1,700 a year in child benefit.

But a two-earner family where both parents earn £42,000 a year – giving them a combined household income of £84,000 – will continue to receive their child benefit, even though they are better off.

The Institute of Fiscal Studies (IFS) warned that government’s proposals would also “seriously distort work incentives for some families with children”.

Mike Brewer, an economist at the IFS, said: “Adults with children whose income places them below the higher-rate income tax threshold might find themselves considerably worse off from a small rise in income.”

He added: “A one-earner couple with an income of £43,875 would need a pay rise of £2,975 or more to ensure they were no worse off after paying income tax and national insurance and losing child benefit.”

Aides to the chancellor insisted the plans were fair, and said the only other option was to means-test child benefits.

The coalition has also drawn up plans to scrap child benefit for parents with children aged between 16 and 18, which could be announced in the comprehensive spending review on 20 October.

Treasury officials say this measure, which would affect 2m families, would save around £2bn.

Meanwhile, unemployed households will have their benefits capped at £26,000 a year.

From 2013, families will not receive more in weekly benefits than the average working family earns, which is expected to total around £500 a week.

Treasury officials estimate that the cap will affect 50,000 households, who will lose an average of £93 a week, although the reforms do not apply to people on disability living allowance.

Larger families and those living in expensive inner London areas will be disproportionately affected, and could be forced to move to cheaper areas.

Aides to the chancellor said they expected the cap to save “hundreds of millions of pounds a year”, although they would not be drawn on exact figures.

Labour said the move undermined the coalition’s claim to be a family-friendly government.