‘High Income Child Benefit Charge is unfair’

A new report on thresholds and tapers for Child Benefit says the current system is unfair and complex.

Child Benefits

 

The variable taper rate applying to the High Income Child Benefit Charge is unfair, complicated and should be replaced with a fixed taper rate, according to a new report.

The Tax Law Review Committee report, Thresholds in the tax system: Policy and administrative considerations, says that the current approach to childcare costs is complex and can appear unfair because once an individual earns £100,000 or more, eligibility for Tax-Free Childcare is removed, as is some entitlement to publicly funded nursery places.

That means a parent can be better off earning a lower amount and keeping child support than earning a higher amount, acting as a deterrent to work. It calls on the government to review the restrictions, consider restoring at least publicly funded nursery places as a universal benefit and for the threshold for removing the entitlements to be significantly increased to reduce the numbers affected. The report also states that the government should publish its estimate of the numbers of families affected, as well as the costs involved.

It points out that the rational response by a parent with income in the £100,000- £134,500 range is to reduce their adjusted net income to retain their childcare benefits, which is likely to mean reduce their level of work. However, it could encourage people to increase their pension contributions or not to report all their income. The report says this is not a good outcome.

For childcare costs, the policy choice is between retaining the universality of the benefit or introducing a tax charge along the lines of the High Income Child Benefit Charge. However, it says the current taper for the withdrawal of Child Benefit is steep and works in an unfair manner since the parent faces a higher effective rate if they have more children. It adds that a better design would be to set a fixed taper rate rather than a defined income range for withdrawing Child Benefit.

The report recommends that research be undertaken or commissioned by HMRC to understand better the impact of thresholds and higher marginal rates on different types of individual decisions as it says this could support better decisions on the rate and length of tapers “which at present appear arbitrary”.

Another recommendation is for policymakers to consider the impacts of future inflation when designing new thresholds or allowances.



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