300,000 in dark on Child Benefit cuts

WHAT'S GONE WRONG?
The first thing to say is that the 300,000 who have had warning letters are still going to be paid their child benefit when the cuts kick in next week.

It's just that they may have to pay it back later, and fill in a tax return so it can be taken back through the tax system.

Here's the situation...

If one of you in the home earns £50,000 or more the tax office will start clawing back any child benefit being claimed. And if you earn over £60,000 they will take it all back.

Revenue and Customs estimate that 1.1m households will be affected.

But they've only written to 800,000 warning them, so 300,000 may not have heard, though the Revenue says they should have seen adverts.

WHAT SHOULD PEOPLE DO ABOUT IT?
If you know you're earning so much you'll never be able to keep your Child Benefit, you can simply opt out and save yourself the trouble of doing extra paperwork in future.

170,000 have done that already. You need to opt out by Sunday night to be sure that you've made a clean break and won't have to enter the benefit in a Self Assessment tax return.

If you're not sure - you can just carry on receiving Child Benefit but the high earner in the household will need to fill in a tax return, declaring the money.

Then it'll be clawed back during the following year, in most cases as part of the monthly tax deduction from wages.

There's plenty of time to fill in the form but there is a deadline. For this tax year, it has to be in by the end of January 2014 if you do it online.

You could be fined if the form doesn't arrive.

Child Benefit freeze

Remember: Child Benefit is being cut in two different ways. Everyone who receives it is losing out.


Today plans to take it from high earning families have been condemned by chartered accountants as "seriously flawed in principle and in practice".


This change, due to be implemented from January could end up being a "disaster".


The Chancellor will remove the benefit in part from households with someone earning over £50,000 and entirely if someone brings in over £60,000.


It's a controversial policy. Some say Child Benefit should be simple and universal, others that the rich shouldn't have it, while these accountants say Osborne's plan is too complicated as well as being unfair.


I think people shouldn't forget that there are actually two cuts being imposed: the value of the benefit has been frozen as well. 


The Treasury saves £1.5bn next year from taking Child Benefit from high earners.


And it saves £1.25bn in the same year by freezing the rates for everyone. The freeze has already started.


Anyway, here's an extract from the Institute of Chartered Accountant's (ICAEW's) findings:

As currently set out, the legislation is seriously flawed in principle and in practice. Unless the government withdraws this clause and schedule with a view to tabling a more workable alternative in time for the Bill’s third reading, we believe the new tax charge could be an operational and reputational disaster for the government and HMRC.

• HMRC will be using the tax system to claw back from one individual a benefit paid to another. The tax system is based on individuals, while the benefits system is based on households. This undermines the principle of individual taxation.
• Families in similar financial situations could be treated quite differently, undermining the policy’s ‘fairness’ objective, and creating very high marginal rates of tax for some.
• Changed family circumstances could make it difficult or impossible to calculate the claw-back, or who should pay it. In the period between the benefit being paid and then clawed back, the couple could be separated, involved in an acrimonious divorce, or completely out of touch with each other.
• Taxpayers could be penalised for failing to submit information they have no access to, particularly if the relationship breaks down.
• Taxpayers could find their confidentiality breached, as HMRC may need to share information about one partner’s (or former partner’s) income and tax affairs with the other.
• It could create 500,000 more self-assessed taxpayers, because taxpayers will have to assess their own liability for the new charge – very expensive for HMRC to administer.

Taxing child benefit

Three million taxpayers will be sent letters in the autumn asking if they or anyone in their household receives child benefit - so that it be taxed from January 2013.

The tax authorities will be targeting those earning around £50,000 a year and above. They will have to fill in self-assessment tax forms so that the benefit can be clawed back.

Those earning between £50,000 and £60,000 will lose a gradually increasing share of the benefit. Higher earners will lose it entirely.

The income tax charge could be levied from monthly pay cheques, via people's personal tax codes. Otherwise, the first tax bills for child benefit will have to be settled by the end of January 2014.

Taxing child benefit

The government will be taxing child benefit -- that's the effect of the new approach to removing it for higher earners.

This autumn HMRC will be writing to people it thinks are earning over £50,000 and have a child benefit claimant in the household.

From January 2013, when the change comes into effect, they will pay an income tax charge which will rise gradually so that all the benefit is removed once income reaches £60,000.

What it means is that all these people will need to fill in a self-assessment tax form so that the tax charge can be worked out.

If their tax affairs are very simple, it's possible that the need to fill in the form will be removed in future. The adjustment will be included in their tax codes.

Child Benefit cuts slammed

The respected Institute for Fiscal Studies has branded the government's planned cut in Child Benefit as "neither efficient nor fair".

Child Benefit is due to be removed from families with a higher rate taxpayer from January next year.

The IFS is warning that the cliff-edge effect of withdrawing the benefit if one parent goes above £42,475 in earnings will hit hundreds of thousands of families.

200,000 could find themselves with a lower overall income after a pay rise.

Another 170,00 could actually increase their income by taking a pay cut.

The IFS recommends a gradual withdrawal of the benefit for higher rate taxpayers.

It says one route would be to integrate it with means-tested Child Tax Credit.

Ministers have already indicated that they are looking at making the planned Child Benefit changes fairer.

Dangers of axing Child Benefit

Anyone who wants to understand the implications of the government's plan to axe Child Benefit for higher rate taxpayers should read this note from the Low Income Tax Reform Group (plus read my previous note here).

It points out the "huge administrative complexity" involved in introducing a tapering system to prevent families suddenly losing thousands of pounds after a small increase in income takes them over the higher rate threshold.

It warns that "independent taxation could become a thing of the past" because the benefit claimant, usually the mother, could have to be assessed alongside a partner paying 40p tax.

It says the new system could become a "tax on marriage" because a single mother would have to think twice before starting a relationship with a higher rate taxpayer.

And it warns of the danger of having to claw back overpayments of Child Benefit because it may only become clear that a family has a higher rate taxpayer after months have gone by.

Now that the higher rate threshold is being reduced to pay for increases in the personal allowance, many taxpayers have no idea that they are joining the 40% club.

Softening the Child Benefit blow

The Prime Minster hints today that the Budget will contain measures to soften the impact of axing Child Benefit for families with an earner in the Higher Rate tax bracket.

So how could that possibly work?

Child Benefit is a universal, untaxed payment: every mother with children gets it if she applies, and the tax office doesn't need to know.

The plan is to deprive families of the benefit if one partner earns more than £42,475, next year's higher rate threshold, saving £2.5bn a year.

As many have pointed out, the change would create two major problems...

1. The Cliff-Edge effect. Stray a few pounds into the 40p tax bracket and a family with two children would lose more than £1,750. Ouch! Promotions and pay rises will lose them money.

2. The One Main Earner problem. If one earner brings in more than £42,475, the benefit is removed. Two earners, with £40,000 each and £80,000 combined, will still get it. The richer household gets Child Benefit, the poorer one doesn't.

The Prime Minister's line that "we always said we would look at the steepness of the curve" suggests that the government is thinking of some sort of tapering mechanism to turn the cliff-edge into a gentler slope.

They could lay down that for every £10 of earnings over the threshold, £1 of benefit would be lost - or something like that

The danger of this is that family income would have to be constantly reassessed in relation to Child Benefit, because incomes tend to fluctuate.

It's just what happens with tax credits. We all know what a bureaucratic tangle that has been.

A tactic to deal with the One Main Earner problem could be to add up the two partners' earnings, then remove Child Benefit when the aggregated amount goes over a threshold, such as the starting point for 40p tax.

Again, that's what they do to assess tax credits and it's very complicated. It's means testing and the tax officer is shooting at a moving target.

The beauty of Child Benefit is that it is so simple: there's minimal administration required and nearly everyone who could get it, does get it. There is one form to fill in to apply.

Tax accountants have described the implementation of this policy and the possible permutations as nightmarish.

Many of them favoured the straightforward inclusion of Child Benefit in taxable earnings. But even this tactic would be hard to police.

Taxpayers would have to own up to receiving the benefit. Many men would find themselves paying tax on money being paid directly to a wife or partner. Millionaires would still qualify for 50% of their benefit. And the Exchequer would gain less.

In any case, for the Chancellor to switch to such an alternative policy would look like an embarrassing U-turn.

How families will lose £1,250 a year

Tax and benefit blows, plus some gains, which the Family & Parenting Institute and IFS say will result in families with children suffering a £1,250 annual loss by 2015.

The key tax and benefit measures affecting families with children that have already been implemented are as follows:

*The income tax personal allowance increased by £1,000 in cash terms for the 2011–12 tax year;
*Increases in all National Insurance rates and increases in the thresholds at which employees’ and employers’ National Insurance start to be paid;
*An increase in the standard rate of VAT to 20%;
*Cuts to tax credits; in particular a three-year freeze in the basic and 30-hour elements of the Working Tax Credit, an increase in the rate at which tax credits are withdrawn as income rises, the abolition of the baby element of the Child Tax Credit and the withdrawal of the family element of the Child Tax Credit from £40,000 rather than £50,000. These are partly offset by an increase in the child element of the Child Tax Credit;
*Reductions in the maximum amounts of rent that can be claimed in Local Housing Allowance;
*A three-year freeze in Child Benefit rates;
*and The use of the Consumer Prices Index (CPI) to index benefit amounts each year rather than the Retail Price Index (RPI) or Rossi index.

Those to be introduced in 2012–13 include:

*A further increase in the income tax personal allowance above normal indexation;
*Reductions in contracted-out rebates in National Insurance;
*A further lowering of the point at which the family element of the Child Tax Credit starts to be withdrawn
*An increase in the number of hours couples with children need to work to be eligible for the Working Tax Credit from 16 to 24;
*Changes to the way in which tax credit awards are recalculated when a family’s income changes during the year which make the system less generous to such families;
*The withdrawal of child benefit from families containing a higher-rate taxpayer from January 2013;
and Time-limiting contributory Employment and Support Allowance for those in the Work-Related Activity Group.

The tax and benefit changes to be introduced in 2013–14 or 2014–15 that affect families with children include:

*The localisation of Council Tax Benefit accompanied by a 10% fall in expenditure.
*A medical reassessment of Disability Living Allowance claimants that is forecast to reduce the caseload by 20%.
*existing claimants of benefits and tax credits will start to be transferred to Universal Credit from April 2014.