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Do child benefit changes signal wider tax system reforms? – Budget 2024

In the 2024 Spring Budget, the Chancellor, Jeremy Hunt proposed changes to the high income child benefit tax charge, which was initially introduced by George Osborne in 2013.

Two words that do not immediately spring to mind when describing our tax system are “simple” and “effective”.

Given the laughably lengthy response times from HM Revenue & Customs (HMRC) currently regarding any even slightly out of the ordinary matters, one wonders exactly how deep Jeremy Hunt thinks his pockets really are when he said at today’s Budget that he would give HMRC the resources it needs to make sure that everyone pays the right amount of tax. The current system is not fit for purpose, but is it time for a change?

The direction of travel would seem to be towards a new tax regime for individuals. I am reluctant to say a simplification as this rarely happens in practice. However that would seem to be the objective, albeit from the point of view of HMRC.

George Osborne announced the move to making tax digital back in 2015 and, aside from VAT, it is not yet here for individual taxation. However, a reform of the current system does seem to be coming with national insurance being effectively absorbed into the self-assessment system, and HMRC starting to get more joined up about how it uses the information it has.

Even now we are starting to see enquiries where HMRC is piecing together information which it would not have had the ability to do previously. This is probably worrying and slightly impressive at the same time. There were also announcements around raising standards in the tax advice market, tightening regulation of tax agents and strengthening the regulatory framework, which is very welcome news. Change, it seems, is certainly coming.

Changes to child benefit tax charges

One aspect of the current system which has been universally acknowledged as unfair is the way the high income child benefit tax charge (HICBTC) is levied. This was introduced in 2013 and has remained unchanged ever since. Where the higher earner in a household has income of greater than £50,000 in a tax year, any child benefit received by the household is subject to a tax charge of 1% for each £100 of income over £50,000. Once income exceeds £60,000, the child benefit is fully lost. It is charged to the higher earner of the household.

The marginal tax rates for those with incomes of between £50,000 and £60,000 and child benefit in the household can be quite substantial. The tax rate for a couple with £2,902 of child benefit and income in that bracket is up to 69%, ignoring national insurance contributions. It also treats households very differently.

For example, Geoff and Mary receive child benefit for three children of £2,902 for 2023/24. They both have income of £49,000, so household income of £98,000 and so do not suffer the HICBTC.

Gary and Sue have the same child benefit, but Gary has income of £60,000 and Sue has no income. Household income is £60,000 but the HICBTC is £2,902.

From 2024/25, the starting point for the HICBTC will be £60,000 rather than £50,000. The taper will be 1% for every £200 of additional income over that, and so the child benefit will not be lost entirely until income hits £80,000.

For now, this is still potentially unfair to different couples but will be a welcome change to those affected by the HICBTC and a stepping stone to the new household income basis from April 2026. It will continue to give rise to some heavy marginal tax rates and both income and pension contribution planning will continue to be important where possible.

Household income basis for taxation

Whilst undoubtedly giving a fairer outcome for child benefit claimants than the current system, what is interesting is the idea of looking at household income, as this would take us back to the early 1990s and before. It is not the first area of tax to look to the past for the future. It is one of the few areas I am still able to say that I am too young to remember, but is it an indication of things to come?

It also means that partners will need to disclose their income to each other, which is not necessary under the current arrangements, as it is sufficient only to disclose whether income is over the threshold and to know whose income is higher. This is perhaps a nuance which will not affect many, but may nevertheless be unwelcome for some.

Of course, the raising of the threshold in this way does mean that many who have ceased to claim child benefit because of the clawback can opt back in to the regime. However, for those who still choose not to receive the benefit, it is important to be aware of the consequences of not claiming as, this will mean that national insurance (NI) numbers will not be automatically issued to the relevant children on reaching age 16. This may require them to attend a face-to-face interview in order to be issued with an NI number. The simplest way to avoid this is to complete the child benefit claim form, but tick the box opting not to receive payments. In this way, the child will be within the system and an NI number should be issued in the same way as for those who do receive the child benefit payments.

Read more analysis in our Spring Budget 2024 hub.

Steve is a Director advising private clients on a wide range of tax matters, including planning for new, prospective and existing property and furnished holiday… read more
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