The cut
“… child benefit will be withdrawn from households paying tax at the higher rate, to ensure that people on low incomes are no longer taxed to provide child benefit for those with bigger salaries.”
Conservatives.com press release, 4 October 2010
The background
On Monday the Chancellor George Osborne announced he would be taking away child benefit from families with at least one higher taxpayer. The current threshold for eligibility to pay this rate is £43,876. The announcement has caused an outcry, not least because there are claims it will affect a swathe of core Tory voters.
The analysis
But it seems that the widely reported £44k threshold – a figure used by Mr Osborne in a BBC interview on Monday morning – is not reliable as a guide to who will be affected. That’s because in June’s budget in was announced that the higher rate tax threshold will actually fall. In short, by time child benefit is cut for higher rate earners in 2013, it won’t be just people earning over £43,876 who will be caught out by the change, but also many more who thought they’d be safe.
Here’s why. In June, Mr Osborne said that to help lower earners, he would increase the threshold above which we pay basic rate tax from £6,475 to £7,475. At the same time, to ensure that higher earners don’t benefit from this as well, he said he would lower the threshold at which higher rate tax becomes payable.
In the Budget documents, it said: “To ensure that support will be focused on those on low and middle incomes the government will reduce the level of the basic rate limit,” so the current threshold of £43,876 will fall in the next few years. We don’t know exactly by how much it will have changed by 201 3. But based on Emergency Budget documents, we know the government thinks it will fall to about £42,375 by next year. Potentially, it could fall as low as £39,000, though we (and the government) don’t know for certain if this is the case.
So, what that means is that if you’re in a household with at least one partner earning over £42,400 then you’ll be hit by this child benefit cut too. And it could be that if you earn much less than that – £39K – you’ll lose as well. The government has promised more details when Parliament returns, later this month.
Which begs the question how many people will actually lose out because of this cut? Well, this has added to the confusion. In its original briefing notes, the government said that 1.2 million households currently have at least one earner paying higher rate tax and also receive child benefit. But today they said they got this wrong and the 1.2 million figure is the number of people they expect to be affected by 2013. The HMRC confessed to CutsCheck that it also doesn’t have figures on the number of higher rate tax paying householders who currently also receive child benefit. If anyone does have this information, CutsCheck would love to hear from you.
The verdict
The more Middle England looks at the child benefit cut, the less it likes it. The small print suggests thousands more will be affected than the Treasury at first disclosed. And while some of those will, to borrow from the PM’s lexicon, have sufficiently broad shoulders to bear the pain, others – the widowed, for example, or single parents earning just enough to miss out – won’t. Still, one minister told me this week’s announcement is just a ‘downpayment’ on the pain that’s to come for the middle classes when all is revealed on October 20. Things are going to get worse before – we all hope – they get better.
