When I got married, a very long time ago, my husband was (at least in theory) responsible for my tax return. But since 1990, we have had independent taxation, so that married women (and now, civil partners of either sex) have their own allowances and are responsible for their own tax affairs. In an answer to a Parliamentary Question on 11 July 1990, the Chancellor, Peter Lilley, said that independent taxation ‘offers all married women the opportunity to enjoy independence and privacy in their own tax affairs’ and that ‘these changes remove the tax penalty on marriage because the tax payable on a married woman’s income will never exceed – as it could previously – the tax payable by a single woman on the same income.’
The benefits system, on the other hand, operates primarily by reference to household income. The underlying logic is that a non-working spouse with no income, with a very wealthy husband (or wife) does not need to be supported by the benefits system. Those on low incomes, including a large number of those who are working but in low-paid jobs, are therefore familiar with the need to provide details of household income in order to claim benefits such as Universal Credit or Child Tax Credit.
The High Income Child Benefit Charge (HICBC) is an ugly hybrid between those two systems. It withdraws Child Benefit from the person claiming it if the income of that person or their partner exceeds a defined threshold (£50,000 from 2013 until the recent Budget, and now £60,000). The benefit is withdrawn using a taper system, so that some Child Benefit can still be claimed on incomes up to £80,000 (previously £60,000). It therefore operates by reference to individual income, but in respect of the higher earner in a couple (whether married, in a civil partnership or living together).
I have grumbled about the complexity of HICBC ever since it was introduced, and commented on it in Tax Journal (9 December 2022). While I am glad to see the limits have been raised, after ten years of being frozen, this is a sticking plaster and not a solution. However, I am far from convinced that moving it to a household basis will make things better.
The perceived unfairness is that a couple both earning £59,999 (a joint income of £119,998) can claim Child Benefit in full, whereas if one partner earns nothing and the other earns £80,000, the HICBC will result in Child Benefit being reduced to nil. This was recognised as an issue when the Finance Bill was debated in 2012, and the then Exchequer Secretary David Gauke said, in a debate on 12 May 2012:
‘It will remain the case that two earners just below the threshold will not have their child benefit withdrawn. To introduce a new means test for family income would be complicated, costly and confusing – the very things that we wish to avoid. We would need to assess all of the 8 million households receiving child benefit, and we would need to do so each year.’
Martin Lewis, of MoneySavingExpert, was delighted with the changes announced on Budget Day 2024. He welcomed the increases in the income limits, and said that he hoped the consultation on moving to family income would mean that this would be in place from 2026.
But the Low Incomes Tax Reform Group said: ‘We would recommend taking a step back and issuing a call for evidence to gather a range of views before jumping into a detailed consultation’.
Robert Joyce of the IFS, writing originally in The Telegraph (29 March), notes that HMRC’s database will have to be changed to record partners’ income, and comments that: ‘Those who fought for individual income taxation, and who won that battle in 1990, may be displeased’. Given that at least one of those people was Professor Judith Freedman, who now chairs the IFS’ Tax Law Review Committee, I think that may be an understatement!
Joyce goes on to make the important point that it is not only administration which will be difficult. If any change is to be cost neutral (i.e. the total cost of Child Benefit is not to increase), then there will need to be a rebalancing between those couples where income is evenly split, and those where it is not – with some 550,000 of the former losing out, and a similar number gaining from any change.
So keeping the HICBC, and moving it to a family income basis, will mean damaging the principle of independent taxation, and upsetting about half a million taxpayers. It will also make the system yet more complex for many people, including several million who may well have to complete self-assessment returns. I am really not convinced that this will be worth it.
Instead, I would favour going back to the principle that Child Benefit is intended to meet some of the costs of having children, which is paid as a universal flat sum – worth much more, proportionately, to those on lower incomes. I would, however, make it taxable, with a basic rate tax credit, so the current amount of about £2,000 for two children would go up to £2,500. Those on the lowest incomes would get an extra £500 per year, and basic rate taxpayers would be no worse off. Higher rate taxpayers would lose £500 and additional rate taxpayers would lose £625. To remove the whole of the benefit from the wealthiest would mean some adjustment to the higher rate bands or rates – but this is feasible, if the political will is there.
Above all, I think we need to stop assuming that every part of the tax system needs to be fair to everybody – that just makes the whole system impossibly complex. Instead, we should focus on making it fairer overall, but also simpler. A universal benefit, withdrawn through individual tax rates, would go a long way towards doing that.
When I got married, a very long time ago, my husband was (at least in theory) responsible for my tax return. But since 1990, we have had independent taxation, so that married women (and now, civil partners of either sex) have their own allowances and are responsible for their own tax affairs. In an answer to a Parliamentary Question on 11 July 1990, the Chancellor, Peter Lilley, said that independent taxation ‘offers all married women the opportunity to enjoy independence and privacy in their own tax affairs’ and that ‘these changes remove the tax penalty on marriage because the tax payable on a married woman’s income will never exceed – as it could previously – the tax payable by a single woman on the same income.’
The benefits system, on the other hand, operates primarily by reference to household income. The underlying logic is that a non-working spouse with no income, with a very wealthy husband (or wife) does not need to be supported by the benefits system. Those on low incomes, including a large number of those who are working but in low-paid jobs, are therefore familiar with the need to provide details of household income in order to claim benefits such as Universal Credit or Child Tax Credit.
The High Income Child Benefit Charge (HICBC) is an ugly hybrid between those two systems. It withdraws Child Benefit from the person claiming it if the income of that person or their partner exceeds a defined threshold (£50,000 from 2013 until the recent Budget, and now £60,000). The benefit is withdrawn using a taper system, so that some Child Benefit can still be claimed on incomes up to £80,000 (previously £60,000). It therefore operates by reference to individual income, but in respect of the higher earner in a couple (whether married, in a civil partnership or living together).
I have grumbled about the complexity of HICBC ever since it was introduced, and commented on it in Tax Journal (9 December 2022). While I am glad to see the limits have been raised, after ten years of being frozen, this is a sticking plaster and not a solution. However, I am far from convinced that moving it to a household basis will make things better.
The perceived unfairness is that a couple both earning £59,999 (a joint income of £119,998) can claim Child Benefit in full, whereas if one partner earns nothing and the other earns £80,000, the HICBC will result in Child Benefit being reduced to nil. This was recognised as an issue when the Finance Bill was debated in 2012, and the then Exchequer Secretary David Gauke said, in a debate on 12 May 2012:
‘It will remain the case that two earners just below the threshold will not have their child benefit withdrawn. To introduce a new means test for family income would be complicated, costly and confusing – the very things that we wish to avoid. We would need to assess all of the 8 million households receiving child benefit, and we would need to do so each year.’
Martin Lewis, of MoneySavingExpert, was delighted with the changes announced on Budget Day 2024. He welcomed the increases in the income limits, and said that he hoped the consultation on moving to family income would mean that this would be in place from 2026.
But the Low Incomes Tax Reform Group said: ‘We would recommend taking a step back and issuing a call for evidence to gather a range of views before jumping into a detailed consultation’.
Robert Joyce of the IFS, writing originally in The Telegraph (29 March), notes that HMRC’s database will have to be changed to record partners’ income, and comments that: ‘Those who fought for individual income taxation, and who won that battle in 1990, may be displeased’. Given that at least one of those people was Professor Judith Freedman, who now chairs the IFS’ Tax Law Review Committee, I think that may be an understatement!
Joyce goes on to make the important point that it is not only administration which will be difficult. If any change is to be cost neutral (i.e. the total cost of Child Benefit is not to increase), then there will need to be a rebalancing between those couples where income is evenly split, and those where it is not – with some 550,000 of the former losing out, and a similar number gaining from any change.
So keeping the HICBC, and moving it to a family income basis, will mean damaging the principle of independent taxation, and upsetting about half a million taxpayers. It will also make the system yet more complex for many people, including several million who may well have to complete self-assessment returns. I am really not convinced that this will be worth it.
Instead, I would favour going back to the principle that Child Benefit is intended to meet some of the costs of having children, which is paid as a universal flat sum – worth much more, proportionately, to those on lower incomes. I would, however, make it taxable, with a basic rate tax credit, so the current amount of about £2,000 for two children would go up to £2,500. Those on the lowest incomes would get an extra £500 per year, and basic rate taxpayers would be no worse off. Higher rate taxpayers would lose £500 and additional rate taxpayers would lose £625. To remove the whole of the benefit from the wealthiest would mean some adjustment to the higher rate bands or rates – but this is feasible, if the political will is there.
Above all, I think we need to stop assuming that every part of the tax system needs to be fair to everybody – that just makes the whole system impossibly complex. Instead, we should focus on making it fairer overall, but also simpler. A universal benefit, withdrawn through individual tax rates, would go a long way towards doing that.
