High Income Child Benefit Charge

Margaret Ferrier Excerpts

Thursday 2nd February 2023 Westminster Hall

[Martyn Day (Linlithgow and East Falkirk) (SNP)]

I beg to move,

That this House has considered the High Income Child Benefit Charge.

It is a pleasure to serve under your chairmanship, Mr Stringer. I put on record my thanks to the hon. Members who supported my application for this debate, and to the Backbench Business Committee for granting it and the Minister for attending.

I invite the House to consider the unfairness of the high income child benefit charge, and the ineffectiveness of its administration. The high income child benefit charge, which for brevity I will forthwith refer to as “the charge”, has its origins in the 2010 Conservative party conference, when George Osborne—the Chancellor at the time—proposed withdrawing child benefit, a previously universal benefit, from higher-rate taxpayers. One might initially approach that as a reasonable proposal; however, the reality is that the charge has consequences for some who do not consider themselves to be on a high income, as it ignores family size, how many earners are in the household, and what disposable income is available after basic needs such as food, housing and energy costs are all met.

Mr Osborne modified his proposals in the 2012 Budget, and went on to announce that, from January 2013, child benefit would be clawed back from families when the highest earner had an adjusted net income of between £50,000 and £60,000. The detail of how the adjusted net income works after taking account of any gift aid or pension contributions, and how those with a £60,000 adjusted net income effectively lose all entitlement to child benefit, was well set out in Westminster Hall by the hon. Member for South Thanet (Craig Mackinlay) during a debate that he secured on the charge in 2019.

[Margaret Ferrier (Rutherglen and Hamilton West) (Ind)]

I congratulate my hon. Friend on securing this debate. The high income child benefit charge is too complicated, which leads to many households that are entitled to child benefit not claiming it. What they may not realise is that not claiming means that they do not accrue the national insurance credits that claimants are given until a child turns 12, impacting on state pension and other benefits if one parent is not working. Does my hon. Friend share my concerns about that knock-on effect?

[Martyn Day]

I do indeed share my hon. Friend’s concerns, and I will come on to them in my speech, although she has summed them up more succinctly than I have in the verbiage I am about to read.

In the previous debate, the hon. Member for South Thanet said that he had

“not found figures for how much the clawback and the lack of take-up of child benefit have saved the Treasury”—[Official Report, 3 September 2019; Vol. 664, c. 60WH.]

but estimated it to be £2 billion to £3 billion a year. I would be interested to know from the Minister whether the hon. Member’s estimate was accurate; I will return to the financial implications of the charge later. The hon. Member went on to say that its administration was

“a salutary lesson in how not to withdraw a universal benefit through the tax system. What we have on the statute book, which runs to many tens of pages of tax law, is the truly mad basis of trying to claw back a benefit. It is not related to overall family income, which many people describe as one of the real drawbacks of the system.”—[Official Report, 3 September 2019; Vol. 664, c. 63WH.]

I have several constituents who agree with the hon. Member—indeed, this goes to the heart of why the charge is seen as unfair. One of my constituents, Andrew Malloy, summed it up when he asked why a family with one parent earning £50,100 could be hit with a tax payback, while a family with two parents earning over £49,000 each was not affected. He has a valid point: a household with a total income of over £99,000 can still receive its full entitlement to child benefit. Shaun Boyle also struggles to understand why that is the rule, as households earning much more than his are entitled to benefits that his household is not. After deliberations, he concludes that

“this cannot be a fair system.”

From my questioning and research, I am inclined to agree with him entirely.

David Stuart is another constituent who stopped his child benefit payments in 2018 after only becoming aware of the high income tax threshold when his second child was born in November 2017. However, that did not stop His Majesty’s Revenue and Customs pursuing him for an overpayment of £6,000 with interest and five years of penalties covering the years from 2016 to 2020 for his two children. I raised David’s case directly with HMRC. It agreed it had made an error both in its assessment and in asking him to contact the child benefit office to get proof of the cessation. The HMRC respondent added:

“I will be providing feedback to the business in order to learn from our mistakes and avoid the same from happening again in the future.”

So far, so good. But David had to contact me again just last month as he had once again been asked to provide proof of how much child benefit had been paid. It therefore appears no action was taken to rectify the failings highlighted in his initial complaint, which HMRC said it was going to address.

David also raised the Wilkes case with me, on which the Court of Appeal ruled on 7 December last year. For those not familiar with the case, it addressed whether HMRC could impose the charge by means of “discovery assessments”, which allow HMRC to demand tax outside of the normal four-year assessment limit. The Court of Appeal conclusively determined that HMRC was wrong to impose the charge by discovery assessments—not just in the Wilkes case but on hundreds of thousands of taxpayers in the UK.

Yet a retrospective change in tax law that was announced by the then Chancellor, the right hon. Member for Richmond (Yorks) (Rishi Sunak), in his 2021 Budget, which was then enacted in sections 97 to 99 of the Finance Act 2022, meant that HMRC ensured in advance of the Wilkes judgment that the hundreds of thousands of other taxpayers who were similarly subjected to the charge discovery assessments could not benefit from the Wilkes case.

As David’s case was delayed awaiting the Court of Appeal judgment, he has now received a further discovery assessment for the charge between the 2016 and 2018 tax years. Understandably, he is “totally miffed” that one person’s case was upheld against HMRC, yet HMRC can continue to pursue others in exactly the same circumstances. In light of the Wilkes case, David hopes that today’s debate will shine a light on the poor handling and unfairness of the discovery assessments.

Another constituent, Stephen Waldron, calls the charge “wholly unfair” because child benefit is a payment to support people with the additional cost of raising a family. Stephen also says the charge is “unjust” because it is not based on a household’s total income. He has questioned why, when people decide to pool their resources and live and raise a family together, does the charge not reflect that? Perhaps the Minister can answer that question for Stephen today.

It was 2006 when Stephen first claimed child benefit. In 2013 he received a letter to advise he was not entitled to it, but it continued to be paid over the next seven years by HMRC, who then reclaimed it and blamed Stephen for not telling it. What really upset Stephen was that the demand for over £8,200 included interest and a 20% penalty for “failure to notify” the tax office to file a self-assessment for all those years, despite HMRC being fully aware of his household’s finances.

The circumstances of Stephen’s experience with HMRC over the charge was robustly argued in the 2019 debate, yet nearly two years later HMRC has not dealt with the previous criticisms of its practices. Things worsened for Stephen and many others as the clawback came in the midst of the covid-19 pandemic at a time when job stability was under one of its greatest threats, and he had to use his “safety net savings” to pay the demand.

I fully appreciate that the abbreviated examples of my constituents that I have highlighted today do not reflect the sense of injustice and stress that they have felt. None the less, it is important that the empirical impact of such an unfair policy is illustrated by individual experiences.

I have been tabling parliamentary questions on the charge since April 2019, after it was first brought to my attention. The answers I received at that time stated:

“If total household income was taken into account, information on the incomes of everyone in each of the eight million households receiving Child Benefit would need to be collected and would effectively introduce a new means test. The Government’s approach withdraws Child Benefit from those on high incomes, whilst having no impact on the majority of claimants.”

That implies that the charge affects only a minority. On means testing, the answering Minister in the 2019 debate stated that this would create

“a substantial administrative burden on both the state and families.”—[Official Report, 3 September 2019; Vol. 664, c. 73WH.]

However, we should not forget that the increase in the number of self-assessments that the charge creates brings its own administrative burden.

Another written answer, which referred to the £50,000 and £60,000 thresholds, said:

“The Government believes these are currently the correct level for the HICBC thresholds, but as with all elements of tax policy this remains under review as part of its annual Budget process.”

Those answers are in keeping with the response to a petition I presented in October 2021, which urged the UK Government to re-examine the charge policy to address the disparities it creates and ensure that any revised threshold was aligned with the basic-rate tax threshold. The basic rate of tax breached the £50,000 threshold on 6 April 2022 and thereby brought basic rate taxpayers within the scope of the charge. It is therefore operating beyond its original policy objective to affect higher rate taxpayers.

After presenting the petition and receiving the Government’s response, I was contacted by a non-constituent who works in financial services, thanking me for presenting the petition as it was

“of national interest to any tax payer who earns over £50,000 GROSS per annum”.

They went on to refer to the Government’s response as seeming to say that it was

“too hard to calculate for little benefit”,

and suggested that indexing the base threshold of £50,000

“would be a simple but effective solution to hundreds of thousands of households.”

I am aware of a letter from the Treasury, dated 26 January 2023, that dismisses the suggestion to index the threshold of the charge as it

“only affects a minority of Child Benefit claimants whilst helping to ensure the fiscal position remains sustainable.”

It appears that the Treasury’s position is somewhat conflicted. On the one hand, it thinks the threshold that was set for the charge 10 years ago is regarded as “high income”, and on the other it thinks it is acceptable for the basic rate tax band to breach this threshold.

Another tax-related conflict arising from the charge is that, although ignoring total household income and focusing on the single or only highest earner, at the same time it breaches the principle of independent taxation. It just does not add up to me.

That brings me back to the financial implications of the charge. When claiming child benefit, an affected individual can receive child benefit payments and pay the charge at the end of each tax year by means of self-assessment, and that is the case even if they are employed and normally pay their tax through pay as you earn. Alternatively, they can claim child benefit, but choose not to receive the payments and hence not pay the charge. That is known as “opting out”, and that is what my constituents David and Stephen, whom I mentioned earlier, have chosen to do. However, opting out impacts tax revenue going into the Treasury, with the most recent available figures showing a £15 million drop between the tax years 2013-14 and 2019-20. If the Minister is able to give figures for how much the clawback and the lack of take-up of child benefit have saved the Treasury, it would be helpful to know that the drop in tax revenue has also been accounted for in any figures that might have been found.

The drop in revenue is surprising when we consider that 7,000 more individuals have declared a liability for the charge over the same period. I would be interested to hear any explanation for that anomaly. The most recent available figures also show that the number of people who opted out of receiving child benefit increased by 252,000 between 31 August 2013 and the same date in 2021. That is 252,000 more families being impacted by the charge over an eight-year period. By my reckoning that is a rapidly growing minority, but a minority is what the Treasury’s response from 26 January still insists it is.

Of course, those figures do not account for those who do not make a claim for child benefit. Not everyone with a gross adjusted net income of £50,000 will go through the process of claiming child benefit, which effectively signs them up to completing a yearly self-assessment for the charge.

The latest data on child benefit from August 2021 shows a decrease of 122,000 families claiming child benefit when compared with the previous year, which equates to 215,000 children. Many people will see claiming child benefit as a complete waste of time and effort for little or no gain, or they will simply not make the claim to avoid finding themselves in a position similar to my constituent David, who was pursued for a period that he had opted out of. Therein lies a danger, because those who do not make a claim to child benefit due to the thresholds of the charge, will lose out on vital national insurance credits that protect their entitlement to contributory benefits, not least the state pension. That situation invariably affects many women.

There is also the scenario that, for various reasons, not everyone is aware of what their partner earns, respecting the principle of independent taxation. That further deters those people from making a claim for child benefit and, again, it is mainly women who lose out. Will the Minister advise me today if there is any way for women, or indeed affected men, caught in those circumstances to make a retrospective claim for national insurance credits? If not, can that be rectified at the earliest opportunity?

Another unintended consequence of not claiming child benefit is that the child is not then automatically allocated a national insurance number when they reach the age of 16. The scale of that future impact can only be imagined if we use the latest data on child benefit that shows that that will affect 215,000 children in just one year.

Referring to the number of families who claim child benefit, the latest child benefit statistics state

“following the introduction of the HICBC in January 2013, these figures decreased sharply…Following the sharp decrease in August 2013, there has been a downward trend in the number of families and children for whom Child Benefit payment is received. In August 2021, the number of children for whom Child Benefit payment is received is at its lowest level since HM Revenue & Customs (HMRC) began producing these statistics in 2003.”

Given the passage of time since its introduction and the constraints of the current economic climate, does the Minister not agree that it is time to address the many failings of the unfair high income child benefit charge? Is it not time to finally review this flawed policy, make it fit for purpose and thereby truly support households with children?

Ultimately, the best solution to meet the needs of families in my constituency is for the full powers of social security and taxation to be in the hands of the Scottish Parliament. Meanwhile, I hope the Minister will join me, my constituents and organisations such as Child Poverty Action Group in calling for making child benefit a universal benefit again, restoring the value of child benefit and increasing the take-up of child benefit. At the very least, will the Minister commit to reviewing the current policy?

[Jim Shannon (Strangford) (DUP)]

I congratulate the hon. Member for Linlithgow and East Falkirk (Martyn Day) on raising the issue here today. I try to come to Westminster Hall as often as I can, but when I saw the subject of the debate I was very keen to come along and support the hon. Gentleman. I congratulate him on setting the scene so well.

I want to specifically focus on the child benefit threshold. As the hon. Gentleman mentioned, one person could earn £52,000 and their partner could earn £10,000, and they would be disadvantaged. However, partners who both earn £49,000 do not have the same issue. That is an anomaly that we have to try to address.

My party discussed this issue at our parliamentary meeting last Tuesday. We have a slot to move a ten-minute rule motion, and we are minded to bring forward this matter when the time comes. I have raised the issue in the Chamber on numerous occasions, as has my right hon. Friend the Member for East Antrim (Sammy Wilson).

I am pleased to see the Minister in her place—I always am, by the way. I know she always tries to give us a response that helps with where we are, so I await her response with anticipation—no pressure, Minister. We are pleased to see her here and we look forward to her contribution.

The cost of living crisis has had a detrimental impact on people’s finances across the whole of the United Kingdom of Great Britain and Northern Ireland. I have spoken in countless debates on this issue. Those who are struggling the most—working families—are among those who cannot make ends meet.

Child benefit is a great benefit. It was designed to be a helping hand, but instead the concept has become a hindrance for working-class families, and even some who were previously considered to be working class and are trying their best to provide their children with all they can. I am a grandparent now, but when we were endeavouring as parents, we tried to give our children as much as we could, as every parent would. That was not to spoil them, but to give them the opportunities that we perhaps did not have when we were younger.

[Margaret Ferrier]

The hon. Gentleman mentioned the cost of living crisis. The fact that the charge is not uprated in line with inflation means that thousands of liable families are losing part of the child benefit that they are entitled to. Does he agree that this must be swiftly addressed?

[Jim Shannon]

I thank the hon. Lady for her intervention; yes, I do agree. Later in my contribution I will ask for the very same thing, because I think it is important that we do so.

We were hoping to present a ten-minute rule motion on this issue in the near future. Our slot is probably in July of this year. I and my party feel that it is grossly unfair that the child benefit cap has remained the same for 10 years, while the price of bread has risen by 30% in Northern Ireland in this year alone. The cost of the diesel needed for people to get to work is up by 30p a litre from 2013, or 20%, while those who invested in electric cars have seen the price of electricity consumption increase from an average of £577 in 2013, with a current price cap of £2,500. Increases are not limited to those essentials. The Government’s retaining of the cap is nothing more than another squeeze of the middle class through taxes. The real burden falls on the middle class, and I, my party and others will do all we can to battle that.

I am pleased to see the shadow Minister, the hon. Member for Hampstead and Kilburn (Tulip Siddiq), in her place, and I look forward to her contribution. No doubt she and others will be saying the same thing.

I am attempting to bring about a change that I encourage the Government to consider. I find it extremely unfair that two parents could be on £49,000 a year and receive child benefit, but one parent can be on £10,000 and the other on £52,000 and they must pay an additional tax charge as a result. That anomaly is critical. A family on £98,000 are okay, but a family on £62,000 are not because one parent earns over the £49,000 or £49,500.

Another issue is that working families feel unable to take a pay rise because they would lose their child benefit and be worse off. I know families who were offered a wage increase from £49,500 and said, “Actually, I’m going be worse off,” and did not take it, so it is a fact of life for many.

A conversation took place in my office just last week on this subject. I always like to put the issues that we debate to my staff members, who give me their perspective. When we discussed it, they said that £50,000 sounded like a very decent yearly income, and it is, but when the cost of living is taken into consideration, these statistics are nowhere near as realistic as they seem. In addition, the high income child benefit charge is collected completely though a self-assessment, whereby individuals who are liable to pay it are required to find an annual tax return and, if they do not do so, they may be charged legal penalties for failing to register their liability and to pay their charge through their tax return, as some 180,000 families have had to do.

It has got to the stage where even families who are entitled to child support are opting out for fear that they will be hit with tax returns that they should have done but perhaps were unaware of. For my generation and the one after that, that was not a problem; we went to work, we received our child benefit, whatever it was, and we were thankful for it. There has been no uplift to the individual salary allowance since 2013—that is 10 years. There has been uncontrollable inflation since 2013, but no uplift for parents.

The Child Poverty Action Group has been in touch with my office, stating that benefit freezes and sub-inflationary upratings mean that child benefit has lost 30% of its value since 2010. One way that can be fixed is for the Government to increase child benefit by just £20 a week per child. That would pull half a million children out of poverty—the very issue that the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier) referred to.

I said earlier that more families are choosing to opt out of child benefits due to the tax self-assessment that must be done. Covid also played a part in the reduction in the number of people applying for child benefit, mainly because parents were unable to register new births due to lockdown and there was reduced contact between parents and health visitors. Now that we are more or less out of that era, efforts should be made to reverse that trend.

Many Members, and more importantly many of our constituents, have raised issues about child benefits. No parent should have to sacrifice good work or a pay rise to get the full amount. That is ludicrous. No parent should have to get an accountant to fill in a separate tax return if they earn over £50,000. We must do more to support those parents through child benefits. More importantly, we must ensure that children are protected and that poverty statistics are dealt with. This has become a critical issue in my office, which is why my party is considering introducing a ten-minute rule Bill on it in July. I am sure the hon. Member for Linlithgow and East Falkirk will be one of the signatories when the time comes. We are asking the Minister for some more compassion, understanding and sympathy, given that the process denies some people what they should have by right.