Do you understand the government's complicated child benefit policy for high earners? Here's something that may surprise you: every family - no matter how much a parent earns - will remain entitled to continue claiming and receiving child benefit. Everyone!
The policy that begins on 7 January 2013 for higher rate tax payers will not be a withdrawal of entitlement. At the Budget earlier this year, the Treasury explained that there will be a new "income tax charge" and that the charge will apply only to those households with children where an adult has taxable income above over £50,000.
So the new system is not really means-testing of child benefit, it is really a child tax for higher earners capped at a maximum amount equal to a family's child benefit entitlement.
Take Jack and Jill. Jack earns £80,000 a year designing sprockets for ACME. Jill cares full time for their two young children and claims a total of £33.70 child benefit each week. From next year, Jill remains legally entitled to continue receiving child benefit at £33.70 per week. However, from 7 January 2013, Jack will have to declare to HMRC that Jill is receiving child benefit. He will then be subjected to an additional income tax charge of £1,752.40 which is equivalent to the annual amount that Jill receives in child benefit.
If Jack earned between £50,000 and £60,000, there would still be an additional income tax charge, but at a tapered rate increasing by an additional 1% for every £100 above £50,000. The full income tax charge applies only for earners above £60,000.
CPAG is concerned at how few families understand the new policy. In particular, we are concerned that families may stop claiming child benefit when they do not need to. A vitally important feature of child benefit is that it is paid directly to the parent in the household who is the primary carer for the children. It is in the best interest of children that the money continues to go to the main carer. So if you are affected by the policy, please take note that you do not have to stop your claim.
But if you or your partner earns more than £50,000 then you will be one of 500,000 people who will be required to fill out a tax self-assessment form for the first time for the administration of the child tax charge.
Tax experts are predicting chaos. There's the unfairness for single earner couples who will have to pay the tax despite having less income than many dual earner families who don't have to pay it. Problems will arise for those close to the threshold whose income fluctuates. HMRC will struggle with enforcement, especially as new dodges are innovated by tax advisers. There are also some rather strange potential outcomes in cases of separation and divorce where a new partner may end up paying a tax charge for children who are not theirs and may not even be resident with them.
Currently, parents in couples who stay at home to care for children still get National Insurance Credits for their pension through an administrative link to child benefit. Ministers said they would ensure nobody loses their NI credits, but as yet they have failed to explain what system will be in place. This is another reason why CPAG are advising that all parents continue to claim their child benefit.
At CPAG we believe as strongly as anyone that higher earners need to make a larger, fairer contribution to dealing with the deficit. But most high earners don't have children living with them. Why are the majority of high earners being left out? In fact the highest earners of all - those with earnings over £150k, few of whom have children living with them - have even had their tax cut.
It's a parliamentarian from the government benches who has been speaking most sense on this. Conservative MP, Christopher Chope, rebelled and voted against the child tax plans. He argued that instead of targeting only higher earners with children through a complicated, costly and bureaucratic scheme, the Government could simply put in place a small rise in income tax for all higher earners - those with children, and those without children. This would spread the burden more thinly and fairly across all high earners and would not require a new, complex and costly bureaucracy.
Child benefit in its earlier existence was actually a child tax allowance. Working families were given a per-child tax allowance, similar to the personal tax allowance, in recognition of the extra costs of having children. It became child benefit in the 1970s as it was found to be simpler, more efficient and more cost effective to have one system of financial support for children, going directly to the primary child carer, rather than a separate one for those families without work.
Child benefit therefore always needs to be understood in terms of its integral relationship with the tax system. Higher earners get child benefit, but they also pay more tax. The tax system is already an excellent system of means testing and could be used further.
Child benefit also means that parents get to effectively spread their tax burden over their working life so that the burden is made smaller when they are raising children, but larger once the children have left home - a very sensible thing to do. Let's not forget that the welfare state was designed not only for the poorest, but also to do sensible things like this that make life a bit easier for everyone.
The principle of higher earners making a greater contribution is absolutely right, but this is a stupid way to go about it. It is complicated and expensive and results in double means testing with a double system of bureaucracy and more cost to the taxpayer for the double administration. Before the chaos hits, the policy should be shelved.
Follow Alison Garnham on Twitter: www.twitter.com/@CPAGUK