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Child Benefit Reform Hits Families Where it Hurts

Sumit Agarwal, founder and Senior Partner, DNS Associates

January 7, 2013 saw reforms to the child benefit (CB) system. CB used to be a universal benefit paid to all households with children at a rate of £20.30 per week, or £1,055.60 a year for the oldest child, and £13.40 a week, or £696.80 a year, for each younger sibling. CB ended when the child turned 16, completed his or her A-levels, or left full-time education or training.

My personal feeling is that this reform will probably cost the Treasury more than it saves: child benefit, previously awarded to all families with children regardless of income, was a generous and easy-to-administer gesture by government to support families. Now that it is means tested, around 1.1 million people earning more than £50,000 a year will have already lost or will lose some or all of their child benefit payments worth, on average, £1,300 per family.

To my mind, government has committed a grave error, creating an administrative nightmare, alienating the electorate by adding insult to injury as all those people who did not voluntarily opt out of child benefit will have it clawed back through the tax system and will need to submit a self assessment tax return to do so, but fundamentally, government has created a system that is blatantly unfair.

The reform:
• CB payments are tapered once one parent earns £50,000;
• Tapering is at a rate of 1% for every £100 over £50,000;
• Parents earning over £60,000 are no long entitled to CB;
• CB is clawed back as an income tax charge on the higher earner;
• 90% of families, around 750,000 households, still receive all or some of their CB.

The injustice of the reform becomes really apparent when you consider the reality: take a family with one parent earning £25,000 and one earning £45,000; they will still receive the full benefit. A family with one parent earning £25,000 and a second earning £55,000 will receive part of the benefit, £527.80 a year for their first child and £348.40 for each younger child; a tax charge will be collected through PAYE and self-assessment from the higher earning partner in the family. A couple both earning £49,000 a year will also still be entitled to the full benefit. However, a family with a single earner taking home more than £60,000 will get zero. Where is the justice in that?

Is there a solution?
HMRC were set to write to all those affected by the end of 2012, but this did not come about uniformly, which has meant that many people that should lose their child benefit have not and will have to pay it back through the tax system. You are most welcome to contact DNS to discuss how we can help: we can assist with your self assessment tax return and offer you advice on how to rearrange the distribution of income within your family if you expect to earn more than £60K as personal income. Please do this as soon as possible to ensure that the new arrangements are in place before the beginning of tax year 2012/13.

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