Budget reform to the high income child benefit charge was long overdue: reaction

by | Mar 7, 2024

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Following Chancellor Hunt’s changes to the HICBC yesterday, experts have generally been reacting favourably to the news of an increased threshold for parents and plans to move to a household system. This was one of the few measures which came as a surprise and had not been previously leaked out prior to Wednesday’s Budget statement.

BDO has welcomed the proposed reforms to the High Income Child Benefit Charge which, they say, should help to reduce an unfairness in the way the charge is applied.

BDO highlights that when child benefit was introduced in 1977 it wasn’t means tested. However, this changed with the introduction of the High Income Child Benefit Charge (HICBC) in January 2013. This tax charge has applied to anyone with an income over £50,000 who gets child benefit – or whose partner gets it. The charge increases gradually for taxpayers with incomes between £50,000 and £60,000, and is equal to one per cent of a family’s child benefit for every £100 of ‘adjusted net income’. Once an individual’s adjusted net income is over £60,000, the charge is equal to the total amount of child benefit claimed.

 
 

BDO reminds that the chancellor also announced that this will be moved to a “household income” based system from April 2026. In addition, from 6 April 2024 the threshold will increase to £60,000 with an extended taper so that the Child Benefit will be fully repayable once your income is over £80,000. For individuals with income between £60,000 and £80,000, the rate at which HICBC is charged will be halved, and will equal one per cent for every £200 of income that is more than £60,000.

Paul Falvey, at tax partner at BDO said:

“While the proposed reforms will address a longstanding unfairness which discriminates against households where there is just one higher earner, there will be significant practical challenges in changing the system so that it takes account of household income.

 
 

“While the transition measures are only due to last two years, we wouldn’t be surprised if they are extended beyond this date to allow time for HMRC to overcome these difficulties.”

“The current system has also dragged many more people into the self assessment tax net who will now be released from the administrative burden of filing a tax return. This is a positive move that will be welcomed by many working parents.”

Laura Suter, director of personal finance at AJ Bell, comments:

 
 

“The decision to finally raise the threshold for child benefit is a big boost to higher-rate taxpayer parents. Someone earning £60,000 a year who currently gets no child benefit thanks to the high-income charge will now get the full child benefit each year. For a parent of two children that represents a total of £2,212.60 a year from April – a decent boost for families.

“The increase to the threshold doesn’t quite go as far as raising it in line with inflation – it would have needed to increase to £65,000 to do that. But the fact that it’s withdrawn at a slower pace means families keep more of the benefit as their earnings grow.

“The child benefit system has been ripe for reform for years. So many families have hit the high income charge, and as a result the number of families getting child benefit payments has dropped to its lowest level since records began, with the continual freeze on the threshold hitting more and more parents. According to the latest figures, a total of 683,000 families opted out of getting the payments, accounting for 1.05 million children. If these families had been eligible they could have claimed £1.15 billion in additional support.

 
 

“The move to assess child benefit based on a couple’s earnings makes sense, as currently the system punishes single earners. Currently, a sole earner on £60,000 gets no child benefit while two earners each on £49,000 will get the full benefit. Under the new system a sole earner on £80,000 will get no child benefit while two workers on £59,000 will get the full benefit.

“However, the government has kicked the can down the road on sorting out those thorny issues – saying it will consult and then implement in two years’ time. There’s no doubt that it’s a huge administration task for HMRC to assess couples on their household income rather than sole income, meaning there is no easy fix.

“This recent change, coupled with plans to allow parents to claim for missing National Insurance credits and allowing them to do so online all feels like fiddling at the edges of a broken system. With an election looming and parents crying out for more help with childcare support, it feels like the time to dismantle the child benefit system and rebuild it with a less complicated, more common-sense approach that works for families.”

 
 
Annual child benefit from April 2024 depending on salary
SalaryChild benefit for one childChild benefit for two childrenChild benefit for three children
£60,000£1,331.20£2,212.60£3,094.00
£65,000£998.40£1,659.45£2,320.50
£70,000£665.60£1,106.30£1,547.00
£75,000£332.80£553.15£773.50
£80,000£0.00£0.00£0.00
Source: AJ Bell.

How the high-income charge works:

Currently, if either you or your partner earns over £50,099, you’ll lose some of the child benefit on a sliding scale until one of you earns £60,000 – at which point you’re not eligible for any child benefit.

You re-pay the benefit at a rate of 1% of the benefit amount for every £100 you earn over that £50,000 threshold. It means if you earn £55,000, you lose 50% of the benefit – because you’re £5,000 over the limit, and at a rate of 1% per £100, that equals 50%. The exact amount of money you lose depends on how many children you’re claiming for.

 
 

From April that ratio will change so that you lose 1% of the child benefit amount for every £200 you earn over the new threshold of £60,000, meaning you lose child benefit at a slower rate than currently. It means that someone earning £70,000 will lose 50% of the child benefit they’re entitled to, while someone on £75,000 will lose 75% of the child benefit amount.

Claire Trott, Divisional Director for Retirement and Holistic Planning, St. James’s Place, commenting on the changes to the High Income Child Benefit Tax Charge said:

“The complexities of the HICBC have for many years created confusion, with some not claiming when entitled and some claiming and having to make tax payments back to HMRC. It was unnecessarily complex and impacted families in completely different ways depending on how the family earned their money. It could even be a driver for one earner not to take more hours or income if they are the higher earning partner in the relationship. Moving to a combined household basis will be welcomed although it will not reduce the complexity entirely, but it will make it fairer.

 
 

“The increase in the taper from £60,000 to £80,000 is a good step in the right direction in the meantime making it less likely families are impacted.”

Les Cameron, Head of M&G Wealth’s team of pension and tax technical experts said:

“The £50,000 limit, where the high-income child benefit tax charge starts to apply, has not increased since 2010. Increasing the threshold to £60,000 will be welcomed by many parents.

 
 

“The intention was always that the high-income child benefit charge should only apply where there was a higher rate taxpayer in the household.

“The proposed move in April 2026 to household income tests will correct the unfairness where a family with two £50,000 earners received the full benefit and one with a single earner of £60,000 received none.”

Michelle Hogan, partner at Forbes Dawson, said:

 
 

“This Budget offers welcome reprieve for some families affected by the High Income Child Benefit Charge (‘HICBC’) but single parents may be disappointed that more substantial reforms designed to tackle perceived unfairness in the rules are to be subject to consultation, according to the Chancellor.

“Under current rules, for every £100 by which an individual’s adjusted net income exceeds £50,000 they lose one per cent of their child benefit entitlement.  Consequently, they lose their benefits in full once earnings exceed £60,000. Jeremy Hunt has increased the lower threshold to £60,000.  At the same time he has altered the withdrawal formula to one per cent for every £200 by which the individual’s adjusted net income exceeds the threshold.  This means that a person now has to earn more than £80,000 to lose their full child benefit.

“Nonetheless, this still leads to a potentially unfair situation where two parents can earn £60,000 each and face no charge, but a single parent on £80,000 has their benefits cut to zero.  With the two-parent family already having a much higher household income this seems wrong.

Mr Hunt has responded to these criticisms by saying he will consult on switching to a household-based system. However, there will be many left disappointed that he hasn’t taken more decisive action.”

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