‘Collision of benefits could be a blow for families’

SOME families could end up facing effective tax rates of at least 80% next year due to a “collision” between Universal Credit (UC) and child benefit, according to one think-tank.

The Resolution Foundation analysis found that a growing number of families with children will find their pay packets hit hard, due to the clash between the two welfare systems.

According to the think-tank, the two systems for withdrawing child benefit and UC were originally intended to support distinct parts of the population.

But a decade-long cash freeze in the £50,000 threshold at which child benefit begins to be withdrawn will mean that around 50,000 families will see the support withdrawn at the same time as UC is also withdrawn.

Karl Handscomb, senior economist at the Resolution Foundation, said: “Freezing the child benefit threshold for over a decade has led to marginal tax rates rising to over 55% for 600,000 families.

“But 50,000 families will face tax rates of between 80 and 96% where they are also seeing their UC payments reduced with each extra pound they earn. The number of families affected by this double whammy is set to almost double by the end of the decade.”

Under the current system impacting England, Wales and Northern Ireland, families on UC often pay high marginal deduction rates, with the Resolution Foundation estimating three million working adults pay effective tax rates of 69% or higher due to paying income tax and national insurance contributions alongside having UC withdrawn as their earnings increase.

The think-tank has said the freeze on the child benefit threshold since 2013 has led to one in 13 families with children, or around 600,0000, facing similarly high tax rates.

The report notes: “Some may be surprised that families containing someone earning over £50,000 can receive UC, but for those with high housing rents, or with significant childcare costs, it is perfectly possible.”

The think-tank is warning that a collision between the two systems has led to the “highest marginal deduction rates in the UK” – 80% for families with one child, 83% for those with two children, and 87% for three children.

One solution would be to raise or withdraw the child benefit withdrawal threshold, according to the Resolution Foundation.

A Treasury spokesman said: “We have a plan that will help to more than halve inflation next year, and have already lifted millions of people out of paying tax altogether by raising the tax-free allowances for both income tax and National Insurance by more than inflation since 2010.”