High Income Child Benefit Charge

Martyn Day 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?

--- Later in debate ---

[Martyn Day]

I am grateful to hon. Members who attended and supported the debate. I am grateful to the Minister for her comments. It will probably not come as a surprise to her that I remain convinced—perhaps even more so—that universality is the easiest and simplest way to resolve the problems that the system has.

One way or another, my constituents still face so many anomalies, with the obvious one being family income versus that of the individual. There is also the fact that the rates have not changed in such a long period of time, so something needs to be reviewed. I look forward to becoming a firm pen friend of the Minister as we go further through these debates.

Question put and agreed to.

Resolved,

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