- Chancellor considers child benefit change
- High income charge criticized
- Threshold adjustment suggested
There are circulating rumours preceding the Budget that the Chancellor may ultimately intervene in the child benefit taper.
Since its inception a decade ago, the high-income charge for child benefit (HICBC) has been criticised for imposing an additional financial burden on parents and introducing superfluous red tape.
The aforementioned levy effectively deducts child benefits from households in which the highest earner’s income exceeds £50,000 and eliminates it when their income surpasses £60,000.
This phenomenon gives rise to a tax entrapment for parents, who are subject to marginal rates that significantly surpass the official income tax threshold of 40%, which becomes applicable at the higher rate threshold of £50,270, in addition to 2% national insurance.
Officially, the income tax and national insurance rate for a person earning £50,300 is 42%; however, due to the elimination of child benefits, the marginal tax rate (the rate on the subsequent pound earned) is 54% for a parent with one child and 63% for a parent with two children.
The child benefit withdrawal policy has consistently generated controversy and necessitated redesign before George Osborne’s implementation of it.
However, over the past decade, the failure to increase the threshold at which parents begin to remit the charge by inflation or wages has resulted in a significant number of parents forgoing child benefit payments and being subjected to marginal tax rates that are considerably higher than those earning hundreds of thousands of pounds annually.
We discuss the contentious nature of the child benefit charge and suggest ways in which the Chancellor could assist parents in the upcoming Spring Budget.
What is the high-income child benefit surcharge?
Child benefit is a monthly payment made to individuals who are responsible for the care of children who are under the age of 16 or, if the child remains in full-time education, under the age of 20. Until just over a decade ago, all parents, irrespective of income, were entitled to this ubiquitous benefit.
You are still eligible to receive the full child benefit, which is presently £24 per week and £15.90 for additional children, if your annual income is less than £50,000.
However, by the child benefit high-income charge, you and your companion will be required to repay a portion or the entire amount if your income exceeds £50,000.
A partner for this definition encompasses not only individuals who are married or in a civil partnership but also two cohabiting individuals.
Initiated in January 2013, the high-income child benefit levy (HICBC) is intended to recoup child benefits from individuals with higher incomes. However, the inability to increase the bar has confined a substantial number of parents to this category.
In contrast to other taxes, this one is calculated on a household income rather than an individual one; therefore, the busier partner in a married couple will be obligated to pay the tax.
Navigating the Child Benefit Threshold
The threshold for adjusted net income, which is an individual’s total taxable income before personal allowances, was established at £50,000. This can be diminished using specific tax reliefs, such as the ability to deduct total pension contributions.
Contribution rates increase in direct proportion to earnings exceeding £50,000. For every £100 in child benefit received beyond the threshold, one per cent must be repaid.
Child benefits decrease once you exceed £60,000 per year and must reimburse the entire fee, forfeiting the benefit.
The elimination of child benefits results in increased marginal tax rates for the parents who are impacted.
You must annually file a tax return and register for self-assessment to satisfy the fee.
To ascertain the amount owed, one may utilise the child benefit tax calculator provided by the government.
What marginal tax rates do parents be subject to?
An increasing number of families with children are obligated to remit the HICBC, notwithstanding their status as lower-income households.
The higher rate threshold has been £50,270 since 2021/22 and is projected to remain at that level until 2027/28. Therefore, certain basic rate taxpayers are now subject to the charge.
The higher-rate threshold of £43,875 was intended to be linked to the point at which child benefit would be tapered at the time the policy was initially proposed. A subsequent increase to £50,000 made it more opulent than the initial policy.
Hargreaves Lansdown estimates that the HICBC threshold would have increased to £67,000 per year if adjusted for inflation. It would be £71,774 per year if adjusted for average salaries.
At present, taxpayers earning between £12,570 and £50,000 are subject to a marginal rate of 32%. This rate increases to 42% for individuals earning between £50,000 and £10,000.
However, parents with one child who earn between £50,000 and £60,000 are subject to a marginal tax rate of 54%. This rate increases to 63% for parents with two children.
This percentage increases to 71% among parents who have three children.
The maximum benefit is available without paying marginal tax if both parents earn less than £50,000. They could earn a combined £99,999.
Why is the elimination of child benefits so contentious?
Since the HICBC was adopted, more taxpayers pay the levy, raising concerns.
This further complicates the situation in which child benefit is retained by households with two earners earning just below £50,000 but is lost by those with a single earner who exceeds the threshold.
Despite rising incomes and living costs, the child benefit withdrawal cap remains £50,000. As with the income tax threshold limit, which has pushed an increasing number of individuals into higher tax brackets, the high-income charge currently functions as a “stealth tax.”
The IFS estimates that slightly more than a quarter of households with children are currently subject to the charge. If the moratorium persists, this number could increase to 31% in 2025-26.
The median disposable household income after taxes for non-retired households was just above £34,000 in 2022, according to the ONS.
Single Earners Face Child Benefit Snare
In households with two earners, the possibility of child benefit termination is diminished. However, in households with a single earner who is also a full-time parent, the tax trap becomes a significant concern.
For homes with a single salaried earner, RSM estimates an adjusted net income over £46,000.
“Even a sub-inflationary pay increase in the period since the end of 2022 could cause that taxpayer to have incurred the HICBC in 2023 if their adjusted net income exceeds £50,000.”
And salary is not the only factor that matters. Individuals are also falling prey to the child benefit tax snare through the accrual of interest on their savings accounts.
The earnings threshold for HICBC encompasses all forms of income. For instance, if you earn £45,000 but additionally receive income from a rental property, a bonus, or interest on deposits. You may be required to pay an additional £50,000.
The enduring concern regarding the elimination of child benefits pertains to its effects on single-income households. The HICBC is calculated on an individual’s income, not the household’s total income.
This means that a person with an adjusted net income of £60,000, either by themselves or in partnership with a non-earning partner, is subject to a tax liability equal to the total amount of child benefit received by the household during the relevant tax year. A couple with two contributors each earning £30,000 would not be subject to the fee.
Additionally, there have been apprehensions regarding the number of taxpayers who have incurred penalties for non-registration. This concern arises because their tax affairs are exclusively managed via the PAYE system.
