Jeremy Hunt has finally bowed to pressure and conceded that a tax penalty affecting many higher-earning parents works in an unfair way and has led to some paying a marginal tax rate of 64%.
Announcing a shake-up of the controversial high-income child benefit charge, the chancellor said nearly half a million families would be better-off by an average of £1,260 in the year from April. For some the gain will be bigger, up to £2,212 a year for some parents with two children.
Under the tax charge, introduced in 2013, the child benefit received by higher earners – those earning more than £50,000 a year – is clawed back via the tax system on a sliding scale.
Called a “tax on children” by some, the charge has resulted in hundreds of thousands of parents having to repay some or all of the benefit. Child benefit is currently paid at £24 a week for the eldest or only child, then £15.90 a week for each additional child, meaning it is worth £2,074.80 a year for a family with two children. The rates rise to £25.60 and £16.95 on 6 April.
After being lobbied by campaigners, the chancellor announced a series of changes – starting by raising the threshold when the tax starts to kick in to £60,000 from next month. The government said that would remove 170,000 families from its clutches.
Child benefit is not means-tested, and the charge is the government’s way of reducing the amount paid to higher earners. About 373,000 individuals were hit with it in 2019-20, and it raised £416m for the government’s coffers that year alone. As of August 2022, however, more than 680,000 families had opted out of receiving child benefit to avoid being penalised.
A combination of frozen tax thresholds and wages rising with inflation has dragged more parents into the charge’s net, adding to the clamour for change.
The charge is currently 1% of the amount of child benefit for each £100 of income made by the highest earner, on a sliding scale between £50,000 and £60,000. For those earning more than £60,000 the charge is 100%. In effect, they receive no child benefit.
In addition to lifting the threshold at which point the charge kicks in, child benefit will not be completely withdrawn until individuals make £80,000 or more.
The government planned to deal more comprehensively with the “unfairness” by moving to a system based on household rather than individual income by April 2026, Hunt said, adding that it would involve significant reform of the tax system.
Overall, the government estimates that 485,000 families will gain an average of £1,260 in child benefit in the 2024-25 tax year as a result of the changes.
The chancellor also provided some relief for nurseries and preschools that have been tasked with delivering a major expansion of the much-publicised childcare offer in last spring’s budget, which will provide 30 hours of “free” childcare for eligible under-5s by September 2025.
The early-years sector was disappointed there was no increase in the amount that the government gives to providers to care for three and four-year-olds, which many argue does not cover costs and is leading to nursery closures.
Hunt announced that hourly early-years funding rates would increase in line with delivery costs over the next two years, representing an additional investment of around £500m.
Neil Leitch, the chief executive of the Early Years Alliance, which represents 14,000 early-years providers, said the move had been long demanded and was welcome. But he added: “While today is certainly a positive starting point, much more support – including significant long-term funding and a comprehensive workforce strategy – is crucial if nurseries, preschools and childminders are to be able to sustainably deliver both existing and upcoming entitlement offers.”
The chancellor also announced “an initial” £105m to fund 15 new special free schools to create more than 2,000 additional places for children with special educational needs and disabilities across England. The locations of the schools will be announced by May.
