10 June 2024

Our tax system should not be punishing parents


The Conservative Party’s new pledge to address the unfairness of the high-income child benefit tax charge is very welcome. As outlined in the Centre for Policy Studies report Family Friendly Taxation’, the current regime is badly designed, distorting incentives for work and punishing one-earner families. 

How will it work?
At present, families are able to apply for a child benefit payment, which is based on the number of children you have. However, if either parent (or a parent’s partner) earns over £60,000 per year, this earner will also have to pay a tax charge, which recoups some of the child benefit. Effectively, the charge withdraws the benefit at a rate of 1% for every £200 you earn over £60,000. 

There are two main problems with this system:

Firstly, there is massive unfairness in how different families are treated. A family with one parent earning £70,000 is at a severe disadvantage to a family with two parents earning £35,000 each, because the charge is applied at the rate of the highest earner. 

Secondly, the charge creates very high effective marginal tax rates for people earning between £60,000 and £80,000, and this rises with the number of children you have. If you have no children, you lose 42p for every pound you earn over £60,000, but if you have one child you lose 49p and if you have three children you lose 62p. 

The Conservatives’ new pledge would help to address both of these problems. Firstly, under the proposed reform, the high-income child benefit charge would be based on household income rather than individual income. This means that different families with the same income would be treated equally.

Secondly, it would move the high effective marginal tax rates higher up the income scale, which would benefit many families. However, this proposal does not eliminate the problem altogether: families earning over £120,000 per year will have their income withdrawn at a high rate. Addressing this would require a more fundamental reform of income tax.

What more can be done?
Unfortunately, even with these changes, the tax system still punishes some families.

Take two families who each have a household income of £60,000. The first family has two earners each making £30,000. The second family has a single earner making £60,000. The first family pays £9,760 in income tax and National Insurance, while the second family pays £14,639, a difference of almost £5,000. That’s because at lower income levels we tax less: the first family can take advantage of tax-free thresholds and lower rates twice, unlike the second family, whose income falls into a much higher rate. 

This is different to many other countries. While the UK taxes individuals at a lower rate than France, Germany and the US, it taxes one-earner families at a much higher rate. The Centre for Policy Studies has recommended making the personal allowance for income tax fully transferable between spouses as soon as possible. In the longer term, the UK should move towards a comprehensive reform of the system so that all families are treated equally.

It’s worth applauding this new Conservative proposal. Raising the threshold and moving it onto a household basis will help hard-working families and address some of the significant unfairness within the tax system against single-earner households. However, even more can be done to make the tax system more family friendly.

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Daniel Herring is Researcher for Economic and Fiscal Policy at the Centre for Policy Studies