Call to end the child benefit charge disaster

Perverse rule stings families with tax rates of more than 100pc, reports Charlotte Gifford

The Chancellor is today urged to spare families from perverse child benefit rules that can lead to marginal tax rates of more than 100pc. Ahead of the Budget next month, it is understood that Jeremy Hunt is looking to address the anomaly that penalises families with just one earner.

A family with a single income of £60,000 loses £34,039 of child benefit, while two parents both earning £49,999 keep the lot. Some parents paying the charge face marginal tax rates of 100pc or more. Meanwhile, HMRC has dragged hundreds of parents to tribunal only to claw back a mere £700,000 – a rate of around £700 per dispute.

Under current legislation, parents claiming child benefit must pay back some or all of the money once one of them earns more than £50,000. The benefit is clawed back via the High Income Child Benefit Charge (HICBC) at a rate of 1pc for every £100 earned over the threshold until they lose it at £60,000.

The Chancellor acknowledged in a recent appearance on ITV’s The Martin Lewis Money Show that there is an “unfairness in what happens with dual-income families on £50,000 each compared to a single earner on £100,000”.

Telegraph Money understands the Treasury is looking at basing the charge on household income rather than individual income. It means parents could start to lose the benefit once they collectively earn £ 100,000 rather than one earning above £50,000.

The move would free thousands of single- income families from paying the charge. Miriam Cates, Conservative MP for Penistone and Stocksbridge, is one of those pushing for an urgent change to the rules.

“It’s unfair for single-earner families to be punished by the HICBC and I would like to see significant reforms or even abolition to correct this,” she said.

Meanwhile, the Resolution Foundation is urging the Government to scrap the charge or otherwise raise the threshold to £70,000.

Adam Corlett, of the think tank, said: “Any tax cuts in the Budget should focus on addressing the worst parts of the tax system.

“That includes the High Income Child Benefit Charge, which can significantly raise parents’ marginal tax rates to 55pc or even over 100pc, and will affect more and more families each year.”

The £50,000 threshold has not changed since it was introduced in 2013. It would be ‘Families where both parents earn £49,999 are still eligible for full child benefit’ worth £66,728 today if it was uprated with inflation. The charge means a two-child family earning a single income of £60,000 could be £34,039 poorer than a family with a total household income of nearly £100,000, even if they have the same total household income, says accountancy firm Blick Rothenberg.

This assumes the family claim child benefit until both children turn 16.

Around 355,000 families missed out on £405m because of the charge in 2020-21, the latest year for which official data is available.

Families hit by the charge also have to fill out a self-assessment tax return to ensure they pay back the correct amount. If they decline to receive the benefit, they risk losing out on valuable state pension credits.

Bryony Lewis, 39, from Portsmouth, said her family are no longer eligible for child benefit even though their total household income has fallen. Her husband took a higher-paid job while she became self-employed in order to work more flexibly around the needs of their children.

She said: “Families where both parents earn £49,999 are still eligible for full child benefit, however with our total family income of £80,000, we are not eligible for anything because my husband earns over three times what I do.”

Over the past five years, almost 1,000 parents have appealed against the charge and/ or late penalties. The average amount

under dispute was £3,295. Fighting a case at the tribunal is expensive for HMRC, and data obtained by The Telegraph in a Freedom of Information request suggest that the tax office is wasting its precious resources chasing after meagre sums.

Across each appeal over the past five years, HMRC has clawed back only £698,584 in tax and penalties – working out at just £747 per case.

Another unfair quirk is that the higher earner pays the tax charge even if their partner receives the benefit. In this sense, the HICBC flies in the face of legislation created by Nigel Lawson, which says that married couples must be taxed as individuals. This was highlighted in a recent tribunal case when father Ian Holland was forced to pay £3,576 in HICBC payments between 2018 and 2020 – despite the fact his ex-wife was the one receiving the child benefit and he was no longer living with his children. A government spokesman said: “The High Income Child Benefit Charge means the Government can continue to support the vast majority of families in a sustainable way and is designed so that people continue to be better off from increased earnings.”