25 July 2023
The high-income child benefit charge (HICBC) results in a gradual clawback of child benefit received by a household where the highest earning partner has adjusted net income (broadly total taxable income minus certain tax reliefs) of more than £50,000 in a tax year. It was introduced in 2013 and the £50,000 charge threshold has remained the same ever since.
A key point of contention with the HICBC is that it is based on an individual earner’s income and not the total income of the household in receipt of child benefit. Therefore, an individual with a £60,000 salary, even with a non-earning partner, would incur an income tax charge equivalent to all the child benefit received by the household in a particular tax year, whilst a couple earning £50,000 each would not incur the HICBC at all.
The unchanged threshold for over a decade is exacerbating a very different problem: the HICBC has become the median household income child benefit charge.
According to the Office of National Statistics (ONS), the median disposable household income for non-retired households in the 2022 financial year (FY) was a little over £34,000. Disposable household income is defined as ‘the amount of money that households have available for spending and saving after direct taxes, such as income tax, National Insurance contributions (NICs) and council tax, have been accounted for’.
In FY 2022, an employee, who was a household’s sole earner, would need to have earned a gross salary in excess of £46,000, in order to have a take-home pay, net of council tax, income tax and NICs, of more than £34,000. A sub-inflationary pay rise, in the period since FY 2022 and today’s date, would take that taxpayer’s gross earnings over £50,000 and into HICBC territory.
The HICBC is already regarded as highly unfair, given that it disproportionately impacts single earner households. In the cost-of-living crisis, even inflation-matching pay rises will fall short of maintaining living standards as, generally, 32% or more of any raise in excess of a £12,570 gross salary will be lost to the taxman in the form of income tax and NICs. Is it right that an earner in a median income household should also incur the HICBC?
The HICBC brings in a relatively low amount of tax; in 2019-20 the combination of taxpayers opting out of receiving child benefit and those incurring the charge itself apparently raised a little more than £1bn. As a contrast, Rishi Sunak is reportedly considering a substantial cut to income tax prior to the next general election, as well as considering abolishing inheritance tax (IHT) altogether. The income tax cut would likely cost the treasury more than £10bn and, with IHT receipts showing no sign of slowing down, abolishing that may cost the treasury the best part of £10bn.
The HICBC has been a headache since it was introduced. It is widely misunderstood by taxpayers and its application has proven incredibly difficult and time-consuming for HMRC to police. Whilst collecting the charge through the PAYE system may, hypothetically, simplify matters for taxpayers and HMRC, such a change is undoubtedly going to throw up new problems. The fact that it has taken HMRC more than a decade since introducing the charge to propose a PAYE method of collection says a lot in itself.
If the government believes it appropriate to contemplate two tax cuts that could cost around £20bn, it is surely time to get rid of, or seriously reform, the comparatively modest and increasingly hard to justify HICBC. Abolishing the HICBC would get rid of the many headaches that come along with it. As well as removing a barrier for taxpayers seeking to grow their income, its removal would presumably also go a long way in helping HMRC re-allocate and efficiently manage its very limited staff resource.