Child Benefit – Who benefits?

Tax Free Childcare

Maybe this makes me a little sad but I can confirm that George Osborne’s 2012 budget was actually the 25th I have sat through since I joined the profession. If I have learned one thing from the previous 24 it is to wait until the Chancellor sits down and the Budget Notes are published to discover what tax changes are really about to hit us. Take this time round – in the speech the Chancellor used these precise words: “Mr Deputy Speaker, in the Spending Review, we took the difficult decision to remove child benefit from families with a higher rate taxpayer. I said then that I simply could not justify asking those earning £15,000 or £30,000 to go on paying Child Benefit to those earning £80,000 or £100,000. And I stand by that principle. All sections of society must make a contribution to dealing with the deficit – without this measure we wouldn’t get the job done. But I said I wanted to do this in a way that is fair and that does not involve setting up some new means tested tax credit system for millions of families. And I said I would set out exactly how this measure would be implemented in this Budget.”

You know what? I should preface my next comment by saying that those are principles which are difficult to argue with. The arguments for paying a universal benefit to everyone are well rehearsed over many years but at times of economic distress we shouldn’t be above ditching the odd principle. And although the politicians will no doubt justify this by reminding us that billionaires have for years been treated the same way as factory workers when it comes to child benefit, the reality is that most of the affected people are not billionaires by any stretch of the imagination.

But to be honest none of that is my point which is this. How does a simple paragraph like the extract above from George Osborne’s speech evolve itself into one of the most complex pieces of legislation I have seen for some time. OK maybe that’s a bit of a stretch – compared to some legislation I have seen this is Enid Blyton stuff. But mostly the really complex stuff tends to affect a handful of circumstances where the application is rare and occasional. This change potential affects a huge number of ordinary people and if I learned one other thing from the previous 24 budgets, it’s that complexity that affects everyone is inversely proportionate to effectiveness. Look no further than the debacle that was originally tax credits if you doubt that.

Anyway this is HMRC’s simple explanation of how all this will work:
“Legislation will be introduced in Finance Bill 2012 that imposes a new charge on a taxpayer who has adjusted net income over £50,000 in a tax year, where either they, or their partner, is in receipt of Child Benefit for the year. This will have effect from 7 January 2013. If both partners have adjusted net income over £50,000, the partner with the higher income is liable for the charge. The income tax charge will apply at a rate of one per cent of the full Child Benefit award for each £100 of income between £50,000 and £60,000. The charge on taxpayers with income above £60,000 will be equal to the amount of Child Benefit paid.

Child Benefit claimants will be able to decide not to receive Child Benefit if they or their partner do not wish to pay the new charge. For the tax year 2012-13, the first year of the charge, the amount of income taken into account will be the full amount of income for 2012-13 and the amount of Child Benefit will be that paid in the period from 7 January 2013 to the end of the tax year. For subsequent years, the full amount of Child Benefit and the income for the year will be taken into account.
I understand that. But then I would seeing as I have more than 20 years’ tax experience. How many ordinary taxpayers will though? How many of those will suddenly find themselves with unexpected tax bills exceeding £1,000? Honestly this has the stench of the original tax credits legislation all over again. And potentially it’s even more unfair than that. You see the new rules do not consider the joint income of spouses. You start to lose the benefit if either of you earn over £50,000. Which means that if you both earn £49,999 each, you will keep your benefit whereas if one spouse earns more than £50,000 and the other isn’t working, you wouldn’t! Which opens the door wide for those who can divert their income to their partners legitimately. This change also sees yet another attack on the independent taxation of husband and wife. If a wife isn’t working and the husband earns sufficient to lose the benefit, the benefit is still paid to her but he will get the tax bill! And this doesn’t only affect married couples. Anyone living together is affected.

The list of potentially complicated and unfair outcomes goes on and on. You get time apportionment calculations when couples separate or move in together! Instead of the old days where the tax system encouraged people to stay together as far as possible, they have now created an incentive to split up! Really it would have just been easier and probably fairer to tax child benefit and if necessary increase it alongside that to avoid any effect on the poorest. But we are where we are and I suppose the silver lining on this cloud is the planning opportunities it’ll open up for some small business people. But that is a high price to pay in my opinion.