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.