These are exacerbated by the fact that the threshold has remained static since it was introduced nearly seven years ago. We need to find a way to make this interaction of tax and benefits work better, says LITRG.
A controversial policy since its introduction in January 2013, the HICBC claws back child benefit where the claimant or their partner earns in excess of £50,000.1 But LITRG says some households think making a child benefit claim is not worthwhile if it will be clawed back in full via the tax charge, with the added nuisance of needing to complete a tax return. LITRG warns that this trend will have unforeseen consequences for the lower-earning partner and for the child.2
The Office of Tax Simplification’s (OTS) recent report ‘Taxation and life events’ made recommendations3 for reform of the HICBC to ensure that people cannot lose out on National Insurance entitlements and to enable National Insurance credits to be restored to those people who have missed out through not claiming child benefit. The OTS also recommends that the Government considers how to ease the process of enabling children of those who have not claimed child benefit to receive their National Insurance number.
LITRG supports the suggestions by the OTS and calls for the Government to go further, by at least reconsidering the £50,000 threshold at which the HICBC starts, if it is retained in its current form.
Victoria Todd, Head of LITRG Team, said:
“Despite its name, the high income child benefit charge can have consequences for the lower earner in a couple even though the liability to the tax charge falls to the higher earner. This is because where the tax charge applies a household may decide, quite understandably, not to claim child benefit at all. But this means that the lower earning individual may miss out on National Insurance credits, due for the first 12 years, which help to build entitlement towards a state pension.
“The Government’s solution is to allow couples to claim child benefit regardless and, if they wish to avoid the charge, they can choose not to receive payments – but this is not widely known and to many, claiming and receiving a benefit are the same thing.
“HMRC have improved the guidance on the child benefit claim form but there is a risk of that guidance being missed if people do not get as far as requesting a form. It is important for HMRC to improve communications and awareness and consider other ways of ensuring lower earners do not miss out on these valuable credits, especially as the current rules only allow child benefit, and therefore the associated National Insurance credits, to be backdated for three months.
“This is a problem which is affecting an increasing number of families because the £50,000 threshold has remained static since the charge was introduced in 2013. At that time, the HICBC was intended to affect only the top 10 per cent of earners, but each year the proportion of those affected increases as wages rise.4 LITRG recommends that the next Government considers uprating the £50,000 threshold, just like some other tax thresholds and allowances, to minimise the adverse consequences for those families it affects and ensure the policy works in the way originally intended.”
Notes for editors
1. The £50,000 threshold refers to adjusted net income: https://www.gov.uk/guidance/adjusted-net-income.
The charge can affect a couple earning the same amount in total as another couple whose earnings are more evenly split between them, because the threshold is breached when either partner’s earnings exceed the £50,000 threshold. This feature of the rules seems to be driven by administrative convenience. In addition, where an individual parent’s earnings just cross the £50,000 threshold and child benefit is claimed for two children, they face an effective tax rate of 57.9 per cent until their or their partner’s child benefit entitlement is exhausted. In principle, the effective rate can exceed 100 per cent if child benefit had been claimed for a sufficient number of children.
2. Child benefit claimants are entitled to National Insurance credits for the first 12 years of a child’s life. These are crucial to preserving the claimant’s entitlement to a state pension – which requires 35 ‘qualifying’ years – where they do not otherwise work or receive National Insurance credits on some other basis. Furthermore, a child does not automatically receive a National Insurance number upon turning 16 unless child benefit has been claimed. In this case, the child would need to make an active application for their National Insurance number so they can start their own National Insurance record, which may require a face-to-face interview.
3. On the Child Benefit and the High Income Child Benefit Charge, the OTS recommends:
The Government should review the administrative arrangements linked to the operation of Child Benefit, making clear the consequences of not claiming the benefit, with a view to ensuring that people cannot lose out on national insurance entitlements.
The Government should consider the potential for enabling national insurance credits to be restored to those people who have lost out through not claiming Child Benefit.
The Government should consider how to ease the process of enabling children of those who have not claimed Child Benefit to receive their National Insurance number.
Read the OTS report here.
4. The Institute for Fiscal Studies states that “around 36%, of 370,000, more families will lose Child Benefit in 2019/20 than in 2013/14” as a result of freezing the threshold: https://www.ifs.org.uk/publications/13791
5.. Low Incomes Tax Reform Group
The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. The CIOT’s 18,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact: Hamant Verma, External Relations Officer, 0207 340 2702 HVerma@ciot.org.uk
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