The Chancellor's decision to reform the unfair High Income Child Benefit Charge is a good for families
Paying tax is a depressing inevitability of adult life. Complaints about high taxes are well justified, but most of us grudgingly accept the necessity of taxation on the assumption that the system is fair. We expect that those who earn the most will also contribute the most. Yet the High Income Child Benefit Charge (HICBC) is a tax that is wholly unfair and that’s why I warmly welcome the Chancellor’s decision to reform it.
When the HICBC was announced in 2012, then chancellor George Osborne said that removing child benefit from the households of higher-rate taxpayers was the “simplest way” to achieve a cut in public spending. Simple, perhaps, but this tax raid on families has been deeply inequitable.
Under the HICBC, child benefit begins to be removed as soon as one parent earns more than £50,000 and is fully withdrawn once that salary reaches £60,000. This means that a couple where both parents earn £49,500 – with a total household income of £99,000 per year – receive full child benefit entitlement, worth over £3000 annually for a family with three children. Such families pay tax at the basic rate and may also benefit from state-funded childcare worth thousands of pounds a year.
Contrast this situation with a household where one partner earns £60,000 and the other nothing at all. This household currently forfeits their entire child benefit entitlement, as well as paying higher rate income tax, and potentially saving the taxpayer thousands in childcare fees if the non-earning partner takes on a caring role. This is clearly unjust, and punishes families that have made the choice for one partner to take time out of the workplace to look after children or elderly relatives.
This new tax too often penalises ordinary families on ordinary wages, many of whom have been caught out by HMRC repayment orders. Whilst a salary of £50,000 – such as that of the average police sergeant – is higher than the median wage, a family on this income is in no way wealthy, especially in London. In practice, HICBC has turned out not to be a tax on the very wealthy, but on ordinary families struggling with the costs of housing and trying to balance paid work with caring responsibilities.
It’s high time this tax was abolished, and in yesterday’s budget the Chancellor began this work by raising the salary threshold at which child benefit is withdrawn from £50,000 to £60,000. He also extended the taper band so that families will retain at least some child benefit until one partner reaches a salary of £80,000. This will greatly reduce the effective tax rates that families pay, incentivising work because parents will keep more of what they earn.
This tax cut, along with other changes announced in yesterday’s budget, means that a single-earner couple with two children on a salary of £62,000 will be better off by £3,500 a year. This is no small sum for families facing simultaneous pressures of mortgages, inflation and all the costs associated with raising children.
Even more promisingly, the Chancellor committed to moving towards a “household system” to end altogether the penalty for families where one parent earns significantly more than the other. Under such a system, child benefit would not be withdrawn until total household income reaches a certain amount, so that couples are not disadvantaged for the choice they make in how to split their earnings.
This opens the door to a move away from our internationally unusual system of individualised taxation to a model that much better reflects how household finances really work. Indeed British families can pay as much as 30% more tax than families in many comparable countries, because couples are unable to combine their tax free allowances and receive little or no support for raising children through the tax system.
Building on the HICBC reforms by moving to full household taxation would provide relief to hard-pressed families. And it would also send an important message that society values the essential role that parents play in raising the next generation.
This article was first published in The Telegraph on March 7
