Child benefit reform – it may sound fair at first, but we don’t think it is.

5th January 2013

Every tax and benefit change is accompanied by a row. But the child benefit tax change is proving to be a spectacular one and Mindful Money thinks it will only get worse in the next few months.

The move to reduce or indeed stop child benefit for the highest earners is demonstrating that even reducing what might be called ‘middle class’ benefits is proving very controversial.

If you or your partner is earning more than £50,000 you will be affected with a tapered reduction in your child benefit entitlement with those earning more than £60,000 losing it all. And if you are in the affected group, the more children you have, the more money you are likely to lose. The Institute for Fiscal Studies argues that in the worst case involving some 40,000 families, they will be paying 65p for every extra pound they earn. That figure could prove a very sensitive one for many Conservative MPs in particular.

The Government says about 15 per cent of families or 1.1 million will be affected and that the change is necessary because it means that those with broadest shoulders will be taking their fair share of the burden of the cuts.

The Government also says that 200,000 have opted out of child benefit already as a result of the change. You have until Sunday evening (6th January) to opt out, or you may have to fill in a self assessment tax form. If you don't opt out, you will still receive the benefit but it will be ‘clawed back’ through the tax system. As a result, as many as an extra 500,000 people will have to fill in self assessment forms according to the IFS.

The reform is already being condemned for unfairness and complexity. It certainly feels that the Government is guilty on both counts but it is the unfairness charge that really looks set to stick.

A couple earning £100,000, but split evenly i.e. £50,000 each, are not affected by the change, but a couple where one person is earning £60,000 and the other much less or even nothing will be penalised extensively. 

For the details of what you can do if you fear you are affected, the BBC provided this excellent guide from John Whiting of the Chartered Institute of Taxation late last year. This HMRC tool allows you to calculate your potential liability. Pension firm Prudential offered some advice about how to mitigate the change using pension contributions and gift aid reported on Mindful Money last Friday. You can also reduce your income using your maximum amount of childcare voucher entitlements.

Intriguingly this row to date is not so much between Government and Opposition or at least not yet, but between the Government, particularly the Treasury and economic and statistical think tank, the Institute for Fiscal Studies.

The IFS has issued several detailed critiques of the reform. This is the link to its latest thoughts. It has also proposed its own alternative solution which would roll child benefit into the tax credit system.

But the attack has also attracted what amounts to an almost unprecedented attack back on the IFS with the Government saying: “The IFS proposed abolishing child benefit completely and subsuming it into the tax credit system. We disagreed with this approach.”

For more detail of the Government view, the Exchequer secretary to the Treasury David Gauke defends the change on the Huffington Post. 

But despite the tough Government response, the row may hand Labour the chance to distract from next week's controversial vote on capping other benefit rises to just one per cent. The Coalition had hoped to get Labour on the back foot. But given the scale of the child benefit row so far, things may not quite work out to plan. 

Mindful Money view

We think the Government will come off worst in this row certainly with the IFS and probably with the Labour opposition. But we also suspect it has been lulled into a false sense of security. Yes it has
sent out communications about the issue and yes a large number of wealthier people have responded by opting out of the benefit. But we think it will still come as a massive financial shock to many families, when they realise the cash is being clawed back and they have more forms to fill in. Rightly or wrongly, it will feel like a big tax rise. Even with the change being top of the news this weekend, we suspect it hasn’t sunk in with everyone yet. It will also hit the Conservatives where it may hurt, in the South east and London where housing and childcare costs can put a big strain, even on well off families. Of course, this group are much better off than people in poverty but as we say because this will feel like a big tax rise, it will throw a lot of family budgets completely out of whack. It is very interesting to see what happens politically. In similar situations, we wonder if the change would not have provoked a Prime Ministerial intervention to find ways to sugar the pill. But with the reform so far down the road, Mindful Money doesn’t think there is much of a way out politically unless it comes as part of a wider overhaul of tax and benefits and there is a very long way to go on that. So we don't think David Cameron will be riding to the rescue. (we wonder if the Mayor of London will have a view?)

Whatever the politics, we suspect the change is here to stay. Therefore, if you are affected and feel that it is unfair and overly complex we think you are entitled to be angry. But don’t let that cloud your thinking about what you do next. You should also calmly consider how you can best deal with the change. For example putting money in a pension may mean you bring your earnings below the cap. You will lose that money from your every day expenditure but you will benefit in the long run. Maximising your use of child care vouchers through salary sacrifice can also mean the money is not entirely wasted. To really get to grips with the change it may be best to see a financial adviser. The final interesting point is that some experts suggest it may be best not to opt out of getting the benefit even to avoid the hassle of filling out a self assessment form. But don’t spend the money, if you think you will be due a bill. Remember if your financial circumstances were to change you may not lose the benefit and have to pay tax on it after all. 

In the meantime Mindful Money will keep you updated as this story develops further.   

 

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