Jeremy Hunt is under growing Conservative pressure to remove one of the UK’s most notorious tax cliff edges in his March 6 budget, where some parents on middle incomes are hit with a 71% effective tax rate.
The UK chancellor has said he will fix the issue if he can afford to, although allies insist his fiscal room for manoeuvre is tight. The problem stems from the tapered removal of child benefit if either parent earns £50,000 or more a year.
Harriett Baldwin, Tory chair of the Commons Treasury committee, is leading calls for Hunt to act, warning: “These high marginal tax rates and cliff edges act as a deterrent to taking on promotions and additional work.”
Ending the withdrawal of child benefit entirely would cost £4bn a year, according to the Resolution Foundation think-tank, while raising the point at which parents pay a charge if they claim the benefit to £70,000 would cost £2bn.
Hunt has promised “smart tax cuts” in his Budget that reward work, and Tory MPs hope addressing the problem will be one of his surprises on March 6. The chancellor’s allies said Budget measures on this issue were “unlikely at this stage” but had not been ruled out.
What is the high-income child benefit charge?
The charge was announced in 2010 by then-chancellor George Osborne during the coalition government’s austerity drive and came into effect from 2013. It is designed to claw back child benefit from higher-earning families.
Under the charge, if either parent earns £50,000 or more a year, the level of child benefit they can receive per child is tapered down. A family with three children is currently eligible for £2,900 a year of benefit, but for every £100 of a parent’s income above £50,000, the entitlement falls by 1%.
If one parent earns more than £60,000, the entitlement falls to zero. Those affected by the charge must file a tax return, declare the amount of child benefit they have received and calculate the amount of the charge they owe.
Why is it so controversial?
The policy drew an angry backlash from middle-class parents from the start and that anger has continued to simmer in the decade it has operated, resulting in several high-profile cases at the tax tribunal against the levy.
One critical issue is the high marginal tax rates it creates for affected parents. The Tax Law Review Committee of the Institute for Fiscal Studies has said parents hit by the charge who earn between £50,000 and £60,000 have effective tax rates for income tax and national insurance of 54 per cent for one child, 63% for two children and 71% for three children.
As a result, there has been a steady drop in the number of families claiming child benefit since 2012. In August 2022, the latest HMRC statistics available, 683,000 families chose to opt out of receiving payments.
Sian Marsden, associate director at accountancy firm RSM, said the fear of incurring extra costs and falling foul of the complicated rules may be deterring families “who are in need of the extra support . . . from claiming the child benefit they are entitled to”.
Why did Jeremy Hunt criticise ‘unfairness’ in the charge?
One of the biggest gripes about the charge is that households where a couple both earn £49,999 can keep all of their child benefit. But if one parent earns over £50,000 the household starts to lose the benefit and by the time their income hits £60,000 it is gone entirely.
“Making one partner’s tax liability dependent on the other’s income undermines the right to independent taxation, which is an important contribution to gender equality,” said a recent briefing by the Women’s Budget Group, a feminist economics think-tank.
“I fully accept there is an unfairness in what happens with dual-income families on £50,000 each,” Hunt told ITV’s Martin Lewis Money Show Live last month.
“This is one of many distortions in our overcomplicated tax system that I look at when it comes to every Budget. There are lots of things I’d like to change. If it’s affordable to do so, then I would do so,” he added.
How many people are affected?
The threshold at which the charge applies has stayed the same since it was introduced, despite wage growth and inflation, meaning a wider group of people have been caught by the tax’s net than at the outset.
If the threshold had risen in line with inflation, the charge would now kick in at £66,727, according to the Bank of England’s inflation calculator.
A study by the Institute for Fiscal Studies last year estimated that the number of families affected by the charge had doubled since its introduction from about 1mn, or 13% of families with children, in 2013 to 2mn families or 26% of families with children.
The IFS projected if the threshold were to remain the same in 2025-26, 2.5mn families would be affected or 31% of all families with children. Many of them are potential Tory voters.
What other issues have come up?
Experts said parents are often caught out by the rules. For instance, many do not know that they need to report their liability for the charge to HMRC and risk penalties and late interest payments as a result.
People who choose to forgo child benefit to avoid the charge also lose credits towards their state pension entitlement that come with the benefit.
“Any system purporting to support families and childcare should not contain traps that ordinary unrepresented taxpayers have to navigate themselves out of or suffer punitive consequences,” said Lucy Woodward, partner at accountancy firm Saffery.
How much political pressure is Hunt under?
The chancellor’s allies said his capacity to deliver tax cuts at the Budget will be tightly constrained and his priority will be to fund cuts in either national insurance or income tax cuts to benefit a broad swath of voters.
But an income-tax cut allied to a tax simplification relating to the child benefit charge would be a welcome combination for Tory MPs by incentivising work and helping middle Britain.
Ranil Jayawardena, former cabinet minister and chair of the Conservative Growth Group, said Hunt should help the “squeezed middle”, including police sergeants, junior doctors and experienced teachers.
He said Hunt should change the tax system to make it more “family friendly”. He added: “As Conservatives, we should reward people who are trying to do the right thing.”
A government spokesman said: “The high-income child benefit charge means the government can continue to support the vast majority of families in a sustainable way and is designed so that people continue to be better-off from increased earnings.”
This article was written by George Parker and Emma Agyemang from The Financial Times and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.