LITRG press release: Concern as high income child benefit charge hits basic rate taxpayers

HICBC¹ is both controversial and complicated. For example, taxpayers liable to the charge must file a Self Assessment tax return, even though HMRC may already know complete information about a taxpayer's income through the PAYE system. An individual can be liable to the charge even though it was their partner who claimed child benefit, which is contrary to the principle of independent taxation. The charge is also perceived as unfair because it can affect a couple earning the same amount in total as another couple not liable to the charge whose earnings are split more evenly between them.

The Spending Review in November 2020 confirmed that the Government will increase the higher-rate threshold in line with the September 2020 CPI figure. This means the higher-rate threshold for 2021/22 is set to be £50,270‚ exceeding for the first time the £50,000 threshold at which the charge begins to apply. In a 2021 Budget representation,² LITRG says basic-rate taxpayers will therefore be liable to the charge for the first time from 6 April 2021. This means the policy will no longer meet its original intent to only target higher-rate taxpayers.³ LITRG suggests the Government compensate for eight years of inflation and rising wages by raising the £50,000 income threshold to at least £60,000.

Tom Henderson, Technical Officer for LITRG, said:

"When the high income child benefit charge was announced in 2010, the Government‚ s policy intent was that it would only affect higher-rate taxpayers from January 2013. For the 2012/13 tax year, the higher-rate threshold ‚ the point at which an individual is liable to the higher rate of tax ‚ was £42,475. Since then, the higher-rate threshold has risen broadly in line with inflation but the £50,000 threshold for the high income child benefit charge has remained static. The Government has so far resisted calls to up-rate the £50,000 threshold, but this is no longer tenable now the higher-rate threshold will overtake it from 6 April 2021."

In its Budget representation, LITRG also calls for the point at which child benefit is fully clawed back to increase from £60,000 to £75,000. This is to address the fact that larger families can face higher effective marginal tax rates when they are liable to the charge. For example, where the charge applies to withdraw a child benefit claim for two children, the taxpayer must pay £60 in tax and National Insurance for an additional £100 earned between £50,000 and £60,000. For three children, the rate increases to £67 for an additional £100 earned.⁴

LITRG argues that the structure of the charge encourages those otherwise liable not to claim child benefit. This can have consequences for the would-be claimant‚ s state pension record, as they potentially miss out on National Insurance credits. LITRG urges the Government to ensure that taxpayers do not miss out on these credits where child benefit is not claimed.⁵

Tom Henderson said:

"The high income child benefit charge has been a controversial policy since its introduction. Despite its name, the way the charge operates has consequences for the whole household, including the partner with the lower adjusted net income, and the child.⁶ We would like the Government to carry out a review of the policy and address those areas where it appears the charge is not meeting its original objectives."

Notes 

1. The high income child benefit charge is a tax charge designed to claw back child benefit where the claimant or their partner has adjusted net income in excess of £50,000. The charge was designed in 2012, but it did not apply until January 2013. Because the charge only applies for each £100 earned above the £50,000 threshold, a taxpayer can in fact have adjusted net income up to £50,099 and not be liable to pay the charge. 

2. See https://www.litrg.org.uk/latest-news/submissions/210114-budget-representation-2021-high-income-child-benefit-charge 

3. https://www.gov.uk/government/publications/spending-review-2010 

4. Child benefit is currently paid at a rate of £21.05 a week for the eldest child and £13.95 a week for each additional child. For a 52-week benefit year, the annual entitlement for two children is £1,820. This is withdrawn at a rate of one per cent for each £100 of income above the £50,000 threshold. Therefore, on an additional £100 of income within the £50,000 to £60,000 range, the partner with the higher adjusted net income in such a household suffers £18 of high income child benefit charge, £40 of tax and £2 of NIC: a total of £60.For three children, the weekly entitlement is £48.95, or £2,545.40 for 52 weeks. For an additional £100 of income within the £50,000 to £60,000 range, the figures are £25 of high income child benefit charge, £40 of tax and £2 of NIC: a total of £67. 

5. Child benefit claimants are entitled to National Insurance credits for up to 12 years (or potentially longer if there is more than one child in respect of whom child benefit is claimed). Claimants can opt out of receiving payment child benefit in order to maintain entitlement to these credits while avoiding the high income child benefit charge, but some taxpayers will not make the claim in the first place. 

6. Where child benefit is not claimed for a child, they will not automatically be issued with a National Insurance number when they turn 16. This means they may have to apply for one separately. 

Low Incomes Tax Reform Group 

The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.