The UK government’s new higher income tax charge for those claiming Child Benefit, which comes into effect tomorrow (7th January, 2013), marks an end to universal welfare benefits in the UK. The new scaled charge applies to taxpayers who have an income exceeding £50,000 p.a. and reaches the full Child Benefit value on incomes exceeding £60,000. HM Revenue and Customs estimates that 1.2 million families will be affected, with some 840,000 (70%) losing all their benefit. The average loss for those affected is an estimated £1,300 per year.
According to the Institute for Fiscal Studies (IFS) in 2011-12 Child Benefit accounted for £12.2bn, equivalent to 6% of all welfare benefits. Total benefits for the financial year 2011-12 were estimated to be just over £200bn, with all benefits for families totaling £37bn. To put this into some context, Child Benefit is currently a larger drain on public finances than the combined benefits to the unemployed (at £5.1bn) and income support for the low paid (at £6.9bn). The new charge will not, however, apply to the vast majority of Child Benefit claimants as they earn less than the qualifying income (there are currently 7.9 million total Child Benefit claimants in the UK).
The new benefit charge is the first time since its introduction in 1946 (then called Family Allowance) that Child Benefit has been income related (i.e. means tested). Universal child benefit was one of the three pillars of the post-war welfare state envisaged by William Beveridge in 1942, along with the introduction of a national health service and the maintenance of full employment. Since its introduction the universal Child Benefit has been increasingly valued for its simplicity in an era of growing tax and benefits complexity.
Unless individuals opt out of the benefit by midnight (6th Jan, 2013) they will continue to claim but then need to complete a self-assessment return, and repay the tax charge directly – by January 5th only 200,000 had done so. While it may be argued that, for many, completing a self-assessment form is relatively straightforward, one wonders what Adam Smith might have made of it all. Smith laid out the basic principles of a ‘good’ tax system by proposing four essential ‘canons’ of taxation – perhaps the most relevant one here would be the canon which urged that ‘every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.’ In this case, it may be argued that repaying through an online assessment after failing to ‘opt out’ does not quite square with Smith’s canon of convenience.
How exactly the new Child Benefit regime will be integrated into the benefits capped Universal Credit – due to start later this year – is yet to be clarified. The new Universal Credit will combine housing benefit, income support, jobseeker’s allowance, employment and support allowance, child tax credit and working tax credit, and budgeting loans and crisis loans into a single benefit. If simplicity is what one is after in a tax system, the universal Child Benefit ticks all the right boxes. However, the ‘new’ Child Benefit system is not expected to become part of this integrated Universal benefit system, and hence it introduces a new level of complexity which the ensuing reforms had attempted to eradicate.
As well as adding more complexity to the benefits system, another widely reported criticism is the potential disincentive effect of the tax charge, with marginal tax rates of over 60% for those with three or more children. Marginal tax rates for those earning between £50,000 and £60,000 will rise by 11% for the first child, and an extra 7% for every additional child. In addition, individuals may be encouraged to contribute more to their private pension schemes to reduce their taxable income. What this means is that, as well as potentially distort behaviour in a negative way by encouraging parents to substitute work with non-work activities, it may also cause the Chancellor to over-estimated the savings to the Treasury, and increase the tax gap – the difference between expected tax revenue and actual tax revenue. It is also necessary to reflect on the effect of taking an average of £1,300 out of the pockets of the 1.2 million families affected. Even for those earning in excess of £60,000, it is least likely that the effect will be to reduce household savings and most likely that spending will fall – not exactly what is needed as the economy moves towards a triple-dip recession.