Child benefit changes just move distortions higher up the income scale

Tory plans to change the threshold at which a household loses child benefit won’t fix the fact that some two-child families face a marginal tax rate of 73 per cent, say Ash Majithia  and Tim Sexton

It’s been framed as a hand-out for the wealthy, including executives in Canada. But the real risk with the Conservatives’ plan to raise the threshold at which child benefits start to be taxed is that they simply move a tax trap further up the income scale.

If re-elected, the Tories have said they would double the amount a household can earn before losing the payments from £60,000 to £120,000, which they say will save 700,000 families £1,500. Child benefit payments would be removed entirely from those earning more than £160,000 (currently £80,000).  

However, this would still leave in place the distortion that the High Income Child Benefit Charge (HICBC) causes in a person’s marginal tax rate, albeit affecting fewer, wealthier people.  It also fails to address the similar distortion in marginal tax rates for those with income between £100,000 and £125,140 caused by the withdrawal of the Personal Allowance (PA). As a result, parents with income between £120,000 and £125,140 could suffer a double distortion. For a two-child family this could mean a marginal tax rate of 65.5 per cent in England, Wales or Northern Ireland and an astonishing 73 per cent in Scotland.

Moreover, the proposed move to administering the HICBC on a household, rather than an individual, basis raises some questions. We currently understand that this trap could arise at £100,000 for the higher earner if the other person also had income of £20,000. Equally, there could be no distortions at all for a household where both partners earn £80,000. However, in the absence of the promised consultation on the proposal to move to a household basis, the potential impact is not overly clear, particularly as regards how HMRC will manage the principles of independent taxation (including not sharing income details with a spouse), which taxpayer would pay the HICBC and whether these thresholds may be further increased in future.

It all gets complicated, and this proposal isn’t cheap. It will come at a cost to the Treasury, which the Conservatives estimate would be £1.3bn a year. Clearly the political calculation is that it is worth the cost.

Yet by defusing one tax trap, the Conservatives have inadvertently left the same ordnance elsewhere. Perhaps it doesn’t matter electorally, but the Conservative Party has identified a genuine problem here and we hope the next government, whoever wins, takes action to resolve it.  

Ultimately, what this shows is that elections can be a time to debate principles and philosophies around tax but are usually not good crucibles for developing specific tax policies.  

Good tax policy, like fine wine or whisky, is better for having time to mature to address inevitable initial rough edges.

Ash Majithia is a partner and Tim Sexton a director of Vialto Partners, a leader in global mobility, tax and immigration services.