Child Benefit for higher income families

Child Benefit is a universal, non-taxable cash payment for families with children. It is currently worth £20.30 a week for the eldest eligible child, and £13.40 for each subsequent child. Around 7.9 million families receive Child Benefit at a total cost of £12 billion.

At the Conservative Party conference in October 2010 the Chancellor announced that from January 2013 Child Benefit would be withdrawn from families with a higher rate taxpayer. The measure was expected to affect 1.5 million families and save around £2.4 billion a year.

Commentators highlighted a number of problems with the proposal, including the fact that while a lone parent or single earner couple earning just above the higher rate tax threshold would lose the full amount of Child Benefit, a dual earner couple both earning just under the threshold would escape the clawback. The “cliff edge” problem – whereby the full amount of Child Benefit was lost as soon as the higher rate tax threshold was reached – would also create potentially damaging incentives for people around that income level.

Revised proposals for a “high income Child Benefit charge” were presented in Budget 2012. Instead of clawing back the full amount when income reaches the higher rate threshold (currently £42,475), it is proposed to withdraw Child Benefit gradually at a rate of 1% for each £100 of income above £50,000 a year. Families subject to the full charge – those with a taxpayer with an income of £60,000 or more – may still claim Child Benefit, or alternatively elect not to receive Child Benefit and so avoid the clawback.

The new proposal would affect around 1.2 million families, of whom 70% would be subject to the full charge. Savings are estimated at £1.5 billion

for the first full year, although the numbers affected and the revenue raised would increase in subsequent years if the income threshold remains fixed.

The latest proposals address the “cliff edge” problem, but not the single earner/dual earner issue. Other questions remain, including how HMRC will administer the charge and ensure compliance. It is expected that an additional 500,000 individuals will be subject to Self Assessment as a result of the measure.