9 November 2023

How tax policies are punishing parents

By Phil Campbell

In his first speech of 2023, Rishi Sunak told us that ‘family matters’, and that it runs right through’ the government’s vision for a better future. This sounded nice, but so far we’ve yet to really see this in action. We’ve heard a lot about the ‘five priorities’ but much less about family. 

The forthcoming Autumn Statement provides the chance to put this right, by abolishing one of the government’s most anti-family tax policies – the High Income Child Benefit Charge (HICBC). 

This charge works by clawing back Child Benefit from couples where the highest earner has an income over £50,000 – equivalent to 1% of total Child Benefit for every £100 over £50,000, rising to 100% over £60,000 – even if one partner doesn’t work. It acts as a very high marginal tax on working families, punishing those who have more children, and particularly those on a single household income. 

This year marks the tenth anniversary of this bad policy which the Centre for Policy Studies described as having got ‘even worse as time has gone by’. The punitive tax was introduced in 2013, by the then Chancellor George Osborne, as a compromise following initial plans to stop higher earners receiving Child Benefit entirely. Whilst well meaning, this fudge has ended up becoming a massive headache for families across the country and puts added financial pressure on working parents during a cost of living crisis. 

As it stands, this charge has to be paid via a Self Assessment. This is a rather strange concept as Child Benefit is excluded from the definition of income, as recently confirmed by the Upper Tribunal. For many on a PAYE salary, this will be the only reason they would have to complete a Self Assessment at all. It’s no wonder then that 620,000 families have opted out of receiving Child Benefit entirely with claims having now reached their lowest point.

The income thresholds are not linked to inflation so effectively the charge acts as a stealth tax. If thresholds had been kept in line with inflation, parents would start paying the charge at £65,000 rather than £50,000. Recent research found that freezing the bands has meant that around 600,000 families have seen their marginal tax rates increase to 55%, rising to 63% for two children and 71% for three children.

As the higher rate tax threshold now sits at £50,271, it is estimated that tens of thousands of basic rate taxpayers will now be liable to pay the charge this year. The Resolution Foundation has even estimated that there are around 50,000 families who, despite being eligible for Universal Credit, will now also have to pay the charge. This is perverse. 

The HICBC especially discriminates against single income households. Given that the charge is based on individual income rather than combined earnings, two partners could both be earning £49,999 each (with a household income of almost £100,000) and still be entitled to receive Child Benefit in full. One sole breadwinner earning this income would be entitled to nothing. 

Why does this all matter? As Rishi Sunak set out in his speech at the start of the year, families are good for society and for the economy. We should be encouraging people to have more children, not punishing those who do. Neither should we be punishing parents who have made the choice to stay home and raise their children. These are all conservative principles. 

More urgently, the UK actually needs parents. Miriam Cates MP recently raised the alarm bell about the so-called ‘baby bust’ the country is going through, with its fertility rate now at 1.56 children per woman, far below the 2.1 children necessary to replace the population. 

Hungary, well aware of the dangers of a falling birth rate, has brought in various tax incentives to reverse this trend. If you have more than four children in Hungary, you don’t have to pay any income tax at all. This policy has been a resounding success, with Hungary seeing their birth rate increase by 25% since 2010.

While some more radical pro-family tax policies like these would be welcome in the UK, a good start would be for our tax policy to at least stop actively punishing those who choose to have children. 

The government has committed to ‘simplify the process’ for higher earners to pay back child benefit, by doing this through the tax code rather than through a self assessment, but this does not go far enough.

If this government is truly committed to supporting families, and are looking for the ‘parent vote’ in the next Election, they should seriously consider announcing the scrapping of this unfair and punitive tax on working families – for good. 

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Phil Campbell is a freelance writer and communications professional

Columns are the author's own opinion and do not necessarily reflect the views of CapX.