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The government’s proposed reforms to the child benefit system would create effects that are “bizarre and economically damaging”, the Institute for Fiscal Studies (IFS) has said.
Tax planning and non-compliance to avoid losing child benefit will reduce the government's saving of £2.4bn by £340m, the IFS said in its Green Budget 2012.
The organisation has proposed three alternatives to the reform, which it said would prevent incentivising families to reduce their earnings in order to keep their benefits.
The government has proposed to withdraw all child benefit from any family containing a higher-rate taxpayer.
This will remove 1.5m families from the benefit altogether, although David Cameron has said the government is reconsidering its reforms after a public outcry.
The IFS has put forward alternatives to the government's unpopular plans.
The IFS' biggest concern is the "cliff edge" created by using the higher-rate income tax threshold to assess eligibility for child benefit.
The higher-rate threshold will be £42,735 in 2013/14, which, for a person living with a child benefit recipient who is not a higher-rate tax payer, means a rise in earnings of just £1 per year will trigger the loss of at least £1,000 per year in child benefit.
Alternatively, families in which one adult earns slightly more than £42,735 per year could increase their income through child benefit by at least £1,000 by finding a way to reduce their taxable income.
The organisation added Her Majesty's Revenue and Customs (HMRC) does not know which families will need to have child benefit withdrawn and so the new system will rely on people who live with higher-rate taxpayers to inform the Revenue themselves.
There will also be problems caused by the assessment of child benefit and the assessment of income for tax, as the former is assessed weekly whilst the latter is done annually.
This will make it difficult to administrate benefits for people whose family circumstances change within a year, the IFS said.
The government could consider withdrawing child benefit more gradually, tapering the benefit away as earnings rise instead of the cliff edge approach, the IFS said.
It also suggested the integration of child benefit with child tax credit, but withdrawing it at a separate taper so the withdrawal would be 6.66%.
Child tax credits capture the family's total income, not just that of one member, addressing the inequalities in the government's plans, the IFS said.
If child benefit and child tax credit were merged without a new taper, far more families would be taken out of child benefit than under the government's current proposals, the report said.
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Two sides to this
It is certainly unjust that a high earner is given any kind of social benefit but it is also unjust that the system assesses the individual as it normally takes two (unless you are Elton John) to have a child. I would prefer to have a "household" income of the parents under one roof or the household income of the carer parent in the case of single parent families. There should be a cut off on that of around £50,000 which would sort this out once and for all. There is another argument that says why should anybody get any social benefit for having a child? Surly there is a choice to make if you cannot afford a family. People with no children still have to contribute to pay for schools, child benefit and family tax credit. Counter argument is that these children grow up and form the future society that pays for pensions and the like. That is a good argument if these kids can get work and contribute without drawing benefits themselves to live and have families. The benefits system is a downward spiral unfortunately. Anybody complaining that they are "disadvantaged" by earning £1 more than the higher incoem tax bracket really should take a reality check. Lots of families woudl like to earn enough to pay HRT.
Posted by: dwinsal
They never ask an IFA
Who are these people who invent these barmy ideas? They never ask an IFA for advice on their plans. It's as though we don't exist. Take for example the latest barmy idea. Letting people who have £20K pension income withdraw all their uncrystallised pension investments. Have they thought through the opportunities this gives IFAs? No. So we will soon have a rush of amendments when it dawns on them what they've done.
Posted by: Ken Durkin
Child Beneft Reforms so Unfair
I am single mother working full time to support two teenage boys. I earn just above the threshold and get no financial support from their father who is unemployed with no propsect of working again. If the reforms go ahead I will lose the child benefit however a household with two earners with a salary of lets say £42,000 per annum each would have a household income of over £80,000 per annum yet still be able to claim child benefit!! How unfair and crazy is that!
Posted by: Amanda
Means Testing Costs Money
Child Benefit (Family Allowance - call it what you will) has always had a sensible assessment basis - in that it is not means tested. Child Tax Credit has always been a nightmare because you are asking the Self Employed (in particular) to estimate and then confirm their earnings. Why not increase each Parent's Personal Allowance by ~£1,500 per child (to a maximum of, say, 3). It becomes the Parents responsibility to claim their PA enhancement (once and once only). It automatically falls off when the child reaches 16 (default - one age for every one). If 1 Parent doesn't work because the other brings home enough "bacon", you miss out. If neither Parent works, they will be receiving other benefits anyway. Let's rename this whilst we can and call it "Working Benefit".
Posted by: Steve Hilton
Child benefit reforms.
Ladies and gentlemen, if you are in that awkward position of having income that, with the next salary rise, will cause you to lose child benefit, there is a very, very simple way around it. Do you have a pension with your employer? So, set up salary sacrifice with your employer of an adequate amount into your pension scheme. That way you can get more money into your pension, pay less national insurance, keep your child benefit. Simple. Even if you have no existing pension plan, get your IFA to set one up and proceed as explained. You know it makes sense! No IFA? Oh dear, well email me then.
Posted by: Orlando Furioso
Child benefit reforms
I know a family he works, she doesn't. They have 3 boys and get approx 500 PCM in benefits. They own their own 5 bed house, 2 cars, spent 30k on a loft conversion and a recent sunroom. 2 boys go to prep school at a cost of 600 PCM. they want for nothing all boys an iPhone. You explain to me why there shouldn't be reforms. People who stay at home shouldn't be living it up on government money quite clearly they don't need extra money.
Posted by: Henry
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This change really is just as unfair as it looks ...
My wife and I are each significantly below the HRT threshold, but if one of us was earning our combined salaries it would be just high enough to make them a higher rate taxpayer. In those circumstances, not only would we be paying significantly more tax and NI (due to the loss of the second allowances) we would also lose our child benefit. How can a system that has that effect ever have been judged fair and just? And what a great way to disincentivise those workers earning just below the threshold - what point is there is looking to get a par rise if you are actually going to be worse off afterwards?
Posted by: DavidC