Child benefit: the next scandal in the making

Published by Johanna Gornitzki on 30 October 2012.
Last updated on 30 October 2012

Child with piggy bank

With the credit crunch continuing to bite, it's unavoidable that we all have to tighten our belts. Cuts have to be made somewhere, of course.

And from 7 January next year, these cuts will be made for all households with children where one parent has an income of more than £60,000 a year as they will no longer be entitled to child benefit. Meanwhile, those earning between £50,000 and £60,000 will see their entitlement cut.

Child benefit is currently the only universal child-contingent benefit. It is worth £1,056 a year to a one-child family, plus £697 a year for each subsequent child. This means a family with three kids gets almost £2,500 a year.

In the 2010/2011 tax year, the government estimated that spending on child benefit was about £12 billion. So a good saving can be made here for sure.

But what baffles me isn't so much the decision to cut child benefit for higher earners, but the appalling way the finer details have been sketched out.

Key changes

For a start, no one will actually have their child benefit ‘physically' withdrawn, but payments will continue as usual and then all affected families will have to 'pay the benefit back' through their annual tax return. Anyone who isn't fully aware of this, and carries on spending the money, could be in for a nasty shock when their tax bill arrives.

With research from Experian for the Guardian newspaper revealing that around 3.6 million households have no assets or savings to fall back on, this is worrying news indeed.

Secondly, it will affect all households where one parent is a higher earner, even if that person is the sole provider.

The fact that child benefit withdrawal will be based on individual income, rather than family income, will mean that child benefit will be completely removed from some couples whose joint pre-tax income is £60,000 per year but not completely removed from other couples whose joint pre-tax income is £118,000 per year.

This could severely affect the 2.2 million households with a stay-athome parent who currently earns just enough to make ends meet.

Thirdly, it's not just the parents' income that is taken into account. Anyone who lives with somebody who claims child benefit and has an income of £50,000 or more will have to pay back some or all of their partner's child benefi t through the new tax charge.

According to the Office for National Statistics, there were two million single parents with dependant children in the UK in 2011 – many divorced, separated or widowed.

To think that these parents might have to tell any new partners that they'll have to pay more tax just because the parent is claiming child benefit is perplexing to say the least, especially if they aren't making any financial contributions towards raising the child.

Lastly, working out how much child benefit you can keep could quickly become a logistical nightmare if during one tax year you have changed partners or received a pay rise.

This is because "various complexities arise from the fact that entitlement to child benefit is assessed weekly, whereas income tax assessment is done on an annual basis," explains the Institute for Fiscal Studies. This means HM Revenue & Customs (HMRC) will need to determine what should happen to individuals whose family circumstances change within a year.

Worryingly, only two months before the changes come into effect this still is not clear, and the likelihood some people will manage to ‘escape' paying back the benefit is pretty high. The new system will be a complete mess, and unless HMRC quickly issues clear guidance for those affected it will have the word scandal written all over it.

More About

Leave a comment