High income child benefit charge hits basic rate taxpayers

The Low Incomes Tax Reform Group (LITRG) is calling for the high income child benefit charge (HICBC) threshold to rise to avoid it hitting basic-rate taxpayers for the first time in April

LITRG says this is contrary to the original policy intent, and it is likely to cause the government additional difficulties in raising awareness about the charge among those who do not consider themselves on a high income.

HICBC 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, 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. 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.’

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.

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.

Henderson added: ‘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.

‘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.’