Child Benefit & Higher Earners
Child Benefit is set to be withdrawn from higher rate taxpayers as part of the coalition government deficit reduction plan.
From 2013, higher rate taxpayers will no longer receive Child Benefit.
This change will affect any couple where either partner is paying any income tax at 40p in the pound. Those with earnings of around £44,000 or higher will see their Child Benefit removed.
It expected that the decision will impact upon 15% of families and result in cost savings of around £1 billion.
Under current rules, all parents are paid £20.30 a week for their eldest child and £13.40 each for any subsequent children. Child Benefit payments continue until the child reaches age 19 for those children in full-time education.
Higher rate taxpayers should start planning for the loss of this net income from 2013.
For families with one child, this will result in a cut of £1,055.60 per year. For two-child families, it is a cut of £1,752.40 a year.
We often find that higher rate taxpayers have budgeted to spend all of their net income each year, so the loss of this much net income will have to result in changes to spending habits.
Many people who are paying higher rate income tax on at least some of their income do not consider themselves to be ‘wealthy’. Whilst this cutting of Child Benefit is likely to be disappointing for some families, it is more preferable to cutting Child Benefit for families with joint income exceeding £44,000, which would have resulted in more widespread cuts.
This proposed system could be seen as unfair where two partners are earnings marginally under the higher rate income tax threshold, as they will continue to receive Child Benefit.
Compare this to a situation where one spouse is marginally over the higher rate tax threshold and the other is a non-earner, so they are earning far less in total than the first couple. In this situation, the value of Child Benefit would be removed.
Rather than introducing a complex means test to the Child Benefit system, families with higher rate taxpayers will continue to receive the Child Benefit but will see the equivalent amount removed again through the income tax system.
The Chancellor has also hinted that it will be possible for higher rate taxpayers to stop claiming Child Benefit, so they do not need to repay it through the tax system.
Photo courtesy of wwarby.