The IFS and Tax for the Family call to changes to the High Income Child Benefit Charge

The institute for Fiscal Studies calls for the £50,000 threshold to take account inflation

In comments posted on the IFS website on 7 January 2019 Carl Emmerson, Robert Joyce and Time Walters say that as a result of stealth increases to the The High Income Chid Benefit Charge soon one in five of all families will loose some or all of their child benefit. 370,00 more families will lose some Chid Benefit in 2019-20 than in 203-14. Significant numbers of families who do not contain a higher rate income tax payer will begin to lose some of their Child Benefit for the first time. To see their comments in full, go to https://www.ifs.org.uk/publications/13791.

Tax and the Family has also called for the reform of the High Income Child Benefit Charge

The High Income Child Benefit Charge (HICBC) was introduced in 2012 to remove the benefit of child benefit from those with higher incomes. The Government, George Osborne, the then Chancellor of the Exchequer,  said  had to be ”tough but fair”[1]. The Government was certainly tough but is the charge fair?

The HICBC starts to withdraw the value of the child benefit if you or your partner has an income over £50,000. For people whose, or whose partner’s, income is more than £60,000, the tax charge is 100% of the amount of Child Benefit.

For three reasons the the High Income Child Benefit Charge is ripe for change.

First, the Charge has had almost no public consideration: there was no consultation before it was introduced; there was very little discussion of it as it was going through the House of Commons; and there has been almost none since.

Second, the Charge fails to meet the purposes for which Ministers said that it was being introduced and, as a consequence, it affects families most unfairly.

Third, neither the starting point nor the point at which it removes all the advantage of child benefit is indexed so that, as inflation picks up, the Charge is affecting an increasing number of taxpayers. The marginal rate of tax paid, in particular by large families, can be very high.

In the final section I look to a way forward.

Lack of consultation

The introduction of the HICBC was first announced by George Osborne, then Chancellor of the Exchequer, at the Conservative Party Conference in 2010.[2] Subsequently there was no public consultation on this before the Charge was introduced in the 2012 Budget.

There was no consultative document: the Charge was not included in the draft clauses: and there was very little mention of it in either the Budget debates or during the passage of the Finance Bill. 

There has been very little discussion of the Charge since then. If HMRC have undertaken a post implementation review, the outcome has not been made public.

Failure to meet stated purposes

In his 2010 Conservative Conference Speech, George Osborne said that it was very difficult to justify a system that taxed people at high rates only to give it back in child benefit, or a system that taxed people on low incomes to pay for the child benefit of those earning so much more than them.[3]Subsequently at Treasury Questions just before the 2012 Budget he said that it was fair to ask those in the top 15% of theincome distribution[my emphasis] to make a contribution to the fiscal consolidation.[4]The following day, David Cameron, then Prime Minister, qualified this somewhat when he spoke of not giving child benefit to the wealthiest families [my emphasis].[5]The subsequent background note said “The new {HICBC] is the way the Government is implementing its policy of reducing the amount of child benefit available to families [my emphasis] that include someone who has an income above £50,000.”.

The Child Benefit rules work in relation to households and not to individuals. The Charge was devised in the context of individual taxation and looks at households by seeing whether either partner in a couple, whether married or cohabiting, has an income of over £50,000. But it is the household which is the relevant concept and, by looking across to the income of a partner, it was a breach of the principle of independent taxation – the first breach since the principle had come into effect 22 years earlier.[6] The privacy which independent taxation had brought was largely destroyed for those affected.

At the very brief discussion in the Finance Bill Committee the then Exchequer Secretary to the Treasury, David Gauke, said “The focus on doing this through the tax system and on having one taxpayer above a certain threshold enables us to avoid the position where we would have to put every child benefit claimant through the tax credit system and apply a means tested system to eight million different cases”[7]. A little later he said “Do we do this through the tax credit system, which means putting everybody through that system, and doing it on a household basis, or do we try to find an alternative way of doing it which reduces the administrative demands?”[8].

It is arguable that, even if the Charge applied only where the income of the recipient of the child benefit exceeded £50,000, the appropriate measure of the distribution of income would be that of the household rather than that of the individual. But the argument becomes unanswerable as a consequence of looking across to the income of partners. George Osborne used the concept at Treasury Questions as quoted above. David Gauke’s explanations also suggest that, but for practical considerations, the tax credit system might have been used to restrict or cancel the value of child benefit and that is based on households, not on individuals.

For measuring inequality income is measured on a household basis and account is taken of the number people in the household. The result of disregarding household income is that  the Charge can apply to a one income family in the lower half of the distribution. While those might be fairly extreme cases, families in the seventh or even the sixth decile of the distribution, a very long way below the top 15%, could be affected by the Charge and that would be quite usual.

By contrast a two income couple, both of whose income is approaching £50,000 but does not exceed it, would be in the top 15% of the income distribution and quite possibly in the top decile.

In other words, far from affecting only families in the top15% of the income distribution as was Ministers’ stated intention, the HICBC affects families far lower in the income distribution. At the same time it does not affect all those in the top 15%.

How can that outcome be justified – or considered to be fair?

Lack of indexation

The HICBC applies if the income of the taxpayer, or of his or her partner, exceeds £50,000. The Charge removes all the value of the child benefit where the income is £60,000 or more. Neither of these figures is indexed or has been increased since they were set in 2012. It is true that the rates of child benefit are not indexed and have not been increased since 2015, but that is not the relevant comparison. What is relevant is that, as inflation picks up, the Charge is affecting more and more people, many of whom are by no means well off or falling into within the descriptions which Ministers suggested at the time when it was introduced. 

The notes explaining the Charge said “The design of the Charge means that only 15% of families with children are affected by the Charge”. However the failure to include a provision for indexation casts doubt on that claim: initially it may have been the case that the Charge affected only 15% of families, but it should have been recognised from the outset that it was highly likely that, as incomes rose, so would the proportion of families affected.[9]

Meanwhile the personal allowance has been increased very considerably, so that the higher rate threshold, which was £43,875 in 2010 when George Osborne originally foreshadowed the introduction of the Charge, is, to be increased to £50,000 in 2019. In his 2010 Party Conference speech he said that the Charge would start at the higher rate threshold: the one significant change between then and its introduction in 2012 was that in the event it started at £50,000. With the proposed increase in allowances in 2019, the Charge will apply at the higher rate threshold after all and, if no increase is then made in its limits, it will affect some basic rate payers in 2020. Similarly the £60,000 income limit at which all the value of child benefit is clawed back is likely to be affecting an increasing number of families.

It is worth noting that the £10,000 income band over which the value of child benefit is withdrawn is not affected by the number of children in respect of whom it is paid. As a consequence a taxpayer’s marginal rate in that band, including income tax and NIC, increases with the number of children from 52.76% for one child by 7.12% for each additional child. The marginal rate for an exceptionally large family with eight children exceeds 100% and, while that might be quite unusual, the marginal rate for a family with four children is 74.12% and with five children it is 81.24%. Lower down the income distribution these are the sort of marginal rates which Ministers are trying to reduce today with the introduction of Universal Credit. In addition, in so far as on the whole it is parents with an overseas background who have the largest families, it could be argued to be ethnically discriminatory (as indeed is the two child limit for benefits).

The way forward

The underlying reason for the structural difficulties of the Charge is the bringing together in one provision of a charge based on an individual while at the same time looking across to a partner[10] without taking into account of his or her income. This is coupled with an apparent failure to understand that how well off an individual is turns not only on his or her income but also on the circumstances of the household: this is also the basis on which the statistics of the distribution of income are drawn up.

One way of dealing with this would be to base the Charge on the income of the recipient of the child benefit only. There would be no looking across to a partner. The Charge would then be stated to be levied on individuals with the highest incomes rather than those who are wealthiest or families who are best off.

There would be two drawbacks to this approach. First in many circumstances it would be fairly easy for an individual with a high income to escape the Charge by arranging for someone whose income was below the threshold to receive the child benefit. Second it would apply quite erratically to how well off people were.

The second approach would be to go wholly onto a household basis by not just looking across to any partner but by taking his or her income into account. This would be the same basis as tax credits, and would involve the same sort of issues as have arisen and dealt with more or less successfully over the last fifteen and more years. The question of whether or not two people form a couple, which arises but which may well be ignored consciously or unconsciously under the present HICBC system, would be more critical and here action on the report[11] on couples of the Low Incomes Tax Reform Group, which so far has attracted little attention, might well be helpful for both HMRC and taxpayers.

Under this approach the Charge would relate as closely as reasonably possible to how well off people are as measured by the distribution of income. This would bring it back into line with the original intention of Ministers. And it would do so without requiring all child benefit claimants to go through the tax credit system as David Gauke had warned at the Committee stage of the Finance Bill 2012[12].

Were the threshold of the Charge to be left at its current level of £50,000 the yield would increase. But this would not be the intention and the threshold should certainly be increased at least in line with inflation since it was fixed in 2012: it could be increased further depending on the yield which the Chancellor of the Exchequer thought was appropriate given the overall Budgetary situation at the time and an analysis of winners and losers. In addition the point at which the Charge ran out and the scale of the tapering provision, which would be based on the joint income, should be fixed in a way which was not affected by the number of children in the household so that the overall marginal rate of taxation was smooth and kept as low as reasonably possible.

I also assume that the Charge would be administered by the Tax Credits Office of HMRC and might well stay with that office as all the tax credits work is transferred over the next years to the Department of Work and Pensions with the full implementation of the Universal Credit.  

Leonard Beighton.

January 2019.

[1] Conservative Party   Conference  4thOctober 2010

[2] op cit

[3] Ibid.

[4] Hansard, 6 March 2012, col 708.

[5] Hansard, 7 March 2012, col 841.

[6] The marriage allowance was the second and so far the only other - more benign - breach.

[7] Hansard, 19 April 2012, col 615..

[8] Ibid.

[9] According to the Institute for Fiscal Studies, Report, 7 January 2019, in 2013/14, the first full year, the Charge affected 1.0 million families (13% of the total) of whom 0,7 million lost the whole of the Child Benefit. They estimate the comparable figures in 2019/20 to be 1,4 million (18%) of the total of whom 1.0 million will lose it all. If no change is made by 2022/23 21% of families will be affected.

[10] ‘Partner’ in this context refers to a spouse, civil partner, or someone with whom an individual is cohabiting. 

[11] Couples in the tax and related welfare systems – a call for greater clarity .A research report by the Low Incomes Tax Reform Group of The Chartered Institute of Taxation. May 2015.

[12] Hansard, 19 April 2012, col 615.