Update 12 March 2024: Following the Spring Budget, this is an update to the original blog posted on 28 February 2024. The original blog post is below. The changes to the High Income Child Benefit Charge announced in the Budget last week are welcome. In the short-term, from this April, we will see two changes meaning less people are affected by the charge’s sharp elbows, though the fundamental design of the scheme remains the same. One change is to increase the threshold from which parents start to pay the charge, up from £50,000 to £60,000 a year. The other change is to make the ‘tax rate’ attached to the charge less severe, with the upper income threshold (the point when the value of Child Benefit is taxed away completely) rising from £60,000 to £80,000. In the long-term the Chancellor’s announcement could herald much bigger changes to the policy, and indeed to the whole of the tax and benefit system. We already knew that HMRC was looking into whether it can administer the charge through PAYE rather than through self-assessment, making it possible for employees to pay it more easily. What we found out from the Budget was that the Chancellor has asked HMRC to go further and move to a household basis for assessing income, as we predicted he might do when this blog was first published. The Chancellor said that the move to a household basis for income assessment would occur in April 20206, but in reality, the decision will fall to the next Chancellor (maybe not Jeremy Hunt). It is a big and difficult decision, which faces (at least) three major challenges. First is the problem of creating losers. As the IFS’s Budget analysis shows (see Tom Wernham’s slides), introducing the policy in a cost-neutral way would mean setting the start point of the charge for couples at a joint income of around £86,000. That would mean around half a million two-earner couples being caught by the charge for the first time, and they may be more vocal than the half million households who will gain from the change. Second a household-based charge will be difficult to administer and subject to legal challenge, particularly around ‘edge cases’ where membership of a household is hard to define. Perhaps more important is the change of principle, as the adjustment would fly in the face of the move to individual taxation that came about with the end of the Married Couple’s Allowance in 2000 (for anyone born after 1935). Third, any fundamental change to the policy needs to find an answer to the horizontal equity argument that children cost more wherever you are on the income scale, so it makes sense to levy taxes on everyone rather than through a specific tax on parents. A future Chancellor would be ill-advised to buy-off the problem of creating losers through increasing the threshold income for couples to £120,000 a year. At that level the argument for abolishing the charge completely would be much stronger, as it would raise little money for enormous administrative and legal complexity. And the horizontal equity argument for fully universal benefits will always hold true. More likely, at least under a Labour Chancellor, would be an attempt to mimic the ‘progressive universalism’ that Gordon Brown sought to achieve through tax credits. Shifting the dial on child poverty without extending the reach of Universal Credit implies higher universal benefits, but few politicians embrace the fact that this means higher benefits and higher taxes for all. If progressive universalism comes back into vogue then Child Benefit could become the new Child Tax Credit.

Original blog post from 28 February 2024...

In the run up to next week’s Budget there is speculation the Chancellor will make changes to the High Income Child Benefit Charge (HICBC), the rule that in effect places an extra tax on Child Benefit claimants earning £50,000 a year or more [1].

The problems with the policy are legion, but it’s been criticised in particular for its unfairness and its harmful effect on work incentives. But there is an extra issue with the policy that perhaps deserves more attention – its effect on take-up. All these issues are examined below.

How the High Income Child Benefit Charge works

The HICBC applies whenever someone in a household claiming Child Benefit has an income of more than £50,000 a year. Note that joint income is irrelevant – a couple where both are earning £49,000 are not affected by the charge. It works by HMRC applying a tax adjustment that withdraws 1% of the benefit for every extra £100 received above the £50,000 threshold. The effect is that on incomes above £60,000 the value of Child Benefit is taxed away completely.

On earnings between £50,000 and £60,000 the HICBC tax adjustment will be less than the value of Child Benefit received. For this group the main question is the ‘tax trap’ created by the withdrawal of Child Benefit. As the HICBC is based on the amount of Child Benefit received it means larger families can face quite high withdrawal rates.

For example:

The value of Child Benefit for a family with 3 children is £3,100 a year (from April 2024). This means the highest earners will pay back 31p for every pound they earn over £50,000, so that it is all taxed away when earnings reach £60,000.

Once earnings exceed £60,000 the HICBC tax adjustment will be the same value as the Child Benefit received and households face a choice: pay tax or choose to stop receiving the benefit. As we discuss below, it appears that far too many people are making the wrong choice and stopping (or more likely, never starting) their Child Benefit claim.

Problems with the policy are growing

As highlighted by a recent report from the IFS on tax simplification, the effects of the HICBC are being made worse by the government’s policy of raising revenue through freezing tax allowances and limits. One effect is that more people are now included in the charge, with over 26% of households with children now being liable, double the number paying the HICBC compared to when it was introduced in 2013 at the same cash level. Another effect is that for people with earnings in the withdrawal range above £50,000, the incentive effects of the charge are getting worse.

More people paying the charge means more people are aware of how fundamentally unfair it is. The issue is that the income tax system is based on an individual assessment, so any attempt to implement a ‘means-test’ that applies to couples will be unfair or cumbersome. The HICBC manages to be both. 

The incentives issue arises from the fact the HICBC places an extra tax on people during the period when it is phased-out, between £50,000 and £60,000 a year. As shown above, for a household with three children the effect is like an extra tax of 31% on these earnings.

As a result, the incentive to avoid the tax through reducing work hours, or increasing pension contributions and hence reducing taxable earnings, may be a strong motivation for people to change their behaviour. Notwithstanding whether such changes are for good or ill, economists are rightly suspicious of behaviour that is driven by tax rules rather than economic fundamentals.

The HICBC and benefit take-up

Our recent blog on benefit take-up highlighted the fact that the HICBC has had an adverse effect on the number of people claiming the benefit. The latest statistics on take-up of Child Benefit show a very clear trend: the number of families missing out on Child Benefit is growing rapidly.

It states:

"Since 2012 the take-up rate of eligible children for whom Child Benefit is claimed has reduced steadily year on year, from a high of 97% in 2012 to its lowest level in 2022 of 89%. This is likely related to the introduction of HICBC (High Income Child Benefit Charge) in 2013, which meant that some families no longer claimed Child Benefit."

Detailed statistics show that take-up rates for families with children born since the introduction of the HICBC are even worse [2].

The estimates show that, despite the fact Child Benefit is meant to be a ‘universal’ benefit, a quarter of parents with children under one are missing out on their entitlement. That’s well below the 84% level of take-up that Child Tax Credit achieved towards the end of its life, despite the fact it is a ‘targeted’ benefit.

Change the message on claiming Child Benefit

Academic studies of take-up demonstrate the wide variety of reasons why people don’t claim benefits, including not just individual factors (such as lack of information) but also administrative and policy factors that explain why so many people don’t apply for benefits [3].

The corollary is that there is no ‘magic bullet’ that could be used to raise take-up rates to 100%, at least in a means-tested system. The one change that really would work would be to reverse the HICBC and return to a universal child payment without income limits, where take-up was over 97%. Failing such a radical reversal, changing the message the government gives out could also really help.

The government is already consulting on a change to make it possible for employees to pay the charge more easily. In July last year it announced:

“The government wants to simplify the process for customers who become liable to the High Income Child Benefit Charge, particularly for those who currently need to register for Self Assessment to pay the charge. The government will provide details in due course on how it will enable employed customers to pay through their tax code, without the need to register for Self Assessment.” [4]

It’s possible that the Chancellor will use the introduction of an HICBC tax code (if this is what the government decides to do) to tackle the unfairness issue, obliging both members of a couple to register for the charge, so that their income can be worked out jointly rather than as individuals.

Having an income limit that looks at household rather than personal income would end the unfairness of the HICBC, at least in terms of single earners and multiple-earner families. But it wouldn’t help with the take-up problem. Nor would the other changes to the HICBC that have been proposed, such as raising the income limit from £50,000 to £70,000 or extending the taper for families with more children above the current £60,000 limit.

To help improve take-up of Child Benefit the Chancellor should encourage everyone with children to claim it, even if it is taxed back. Simply putting out the message “Claim child benefit and pay the tax” could help, as among the people who decide to claim it again will be many who do not need to pay tax on it at all. And even for those who end up paying the tax, it will ensure they qualify for national insurance credits sooner and more easily than the government’s complex redress scheme [5].

Rather than across-the-board tax cuts, the Chancellor should focus on reforming the worst bits of the UK's crazy tax system, starting with the HICBC.

Links:

[1] For example, Budget speculation in the Telegraph

[2] See 'Figure 5: The percentage of eligible children for whom Child Benefit is claimed by individual age', at May 2022 at https://www.gov.uk/government/statistics/child-benefit-statistics-annual-release-august-2022/child-benefit-statistics-annual-release-data-at-august-2022#take-up-rate-of-child-benefit

[3] The range of reasons for non-take-up is examined in Fran Bennett’s recent review into benefits take-up at https://bristoluniversitypressdigital.com/view/journals/jpsj/32/1/article-p2.xml

[4] https://questions-statements.parliament.uk/written-statements/detail/2023-07-18/hcws972?

[5] If all goes to plan, from 2026 it should be possible to claim back any years where the individual's lost National Insurance credits because they failed to claim Child Benefit. However, even if the system is delivered on time, filling in a claim for Child Benefit and paying tax via PAYE will always be easier than making backdated claim for NI credits. The government's most recent announcement is available at https://www.gov.uk/government/publications/tax-simplification-update-january-2024/tax-simplification-update-january-2024#amending-the-parents-national-insurance-credit-child-benefit