04/01/2013 10:58 GMT

Child Benefit Cuts To Cause 'Incoherence', Says IFS

Child benefit cuts will cause "incoherence" in the welfare system and lead to some families paying 65% of the money they earn to the taxman, a respected economic think tank has warned.

The Institute for Fiscal Studies (IFS) issued a highly critical analysis of the move to strip the payments from some higher earners from next week.

While it made sense to target universal benefits paid to the better-off as part of efforts to tackle the deficit, the way it was being done was "problematic", it said.

Child benefit cuts will cause "incoherence" in the welfare system

Their analysis comes after Treasury minister David Gauke defended the changes in a blog for The Huffington Post UK, writing "we have always been clear that those with the broadest shoulders should carry the greatest burden when it comes to balancing the nation's books.

"Those liable for the removal of child benefit fall in the top 15% of earners and nearly half of the households affected by this change have a household income of more than £100,000."

However the IFS has warned some families will end up losing as much as 65p of every extra pound they earned - making it more likely they will work less or put more into pension funds to avoid the hit.

It said there were no plans to change the thresholds at which parents would start to lose the payouts, threatening to mean more and more would be caught by the means test.

Households where one parent earns more than £60,000 a year will have to return the entire amount through the self-assessment system unless they have opted out of receiving it in the first place.

It will be taken away on a sliding scale where mothers or fathers earn between £50,000 and £60,000 - causing a significant rise in marginal tax rates for those families.

The system for recovering the cash has proved highly controversial, especially as families where both parents earn just under £50,000 each will keep their payments.

In its short report, the IFS said it expected the average loss to be £1,300 a year, with 820,000 families losing all state help and 320,000 having it cut.

It said the marginal tax rate faced by those with an earner between £50,000 and £60,000 would rise by 11 percentage points for those with one child and another seven for each additional child.

For 40,000 households with three or more children it would jump as high as 65%.

There were also a "series of administrative complexities" including the need for up to 500,000 more people filling in self-assessment.

It emerged this week that almost a third of families affected by the new means-tested rules have not been formally contacted by HM Revenue & Customs because of a lack of up to date information.

But the IFS said that "perhaps the biggest concern is the incoherence it creates in the welfare system" and the impact on introduction of the Universal Credit.

"With the introduction of Universal Credit, the Government will integrate six of the seven existing means-tested benefits and tax credits into one...

"But almost simultaneously, the Government is introducing a new and separate means test for child benefit which will work in a completely different way, as well as making the seventh existing means-tested benefit - council tax benefit - much more complicated by asking every local authority in England to design its own scheme."

In a blog for The Huffington Post UK, TUC general secretary Frances O'Grady also criticised the government's benefit changes, saying "having already frozen child benefit for three years, reduced various tax credits in real terms and changed the measure by which benefits are uprated every year to a lower measure of inflation, the government now wants to restrict annual rises in working age benefits to 1% until 2016."

Shadow Treasury minister Chris Leslie said in a statement the changes to child benefit were "unfair."

"Following the news this week that thousands of parents affected may not even be aware of the changes, it's becoming increasingly clear David Cameron and George Osborne failed to think through how this policy would work in practice."