The news that some 750,000 parents will hold on to some or all of their child benefit was a welcome relief to many – but business leaders have warned the move means more red tape.
Chancellor George Osborne backed down on controversial plans to scrap child benefit for all households where one parent earns enough to pay the 40 per cent higher rate of income tax, following complaints that it would hit families in the “squeezed middle”.
Instead, the benefit – worth about £1,000 a year to parents with one child, £1,700 with two and £2,500 with three – will be withdrawn in April 2013 from those earning £50,000 or more.
And to prevent the “cliff-edge” effect created by the plans which he originally unveiled at the Conservative conference in 2010, the withdrawal will be tapered so families lose one per cent of their benefit for every £100 earned over £50,000.
However a tax expert from the Midlands has warned the move was a step back from a promise to simplify the tax system.
The changes announced will cost the Treasury around £500 million a year, as the total child benefit bill will fall by around £2 billion, compared to £2.5 billion envisaged under the plans set out in 2010.
The chief executive of the Child Poverty Action Group, Alison Garnham, said: “The Chancellor has taken a step in the right direction, showing he has listened to our campaigning, but the new claw back will be complicated and costly to administer.
“In the end, we are still asking families with children to pay for tax breaks for the very richest. This does not pass the fairness test - it would be fairer to ask all high earners to make a contribution than just to target families with children.”
Mr Osborne told MPs that only parents earning £60,000 or more will lose all of their child benefit. Some 90 per cent of all families will continue to receive the previously universal benefit, including 85 per cent who receive it in full.
The change will be funded by bringing the threshold for the 40p tax band down from £42,476 to £41,450, bringing an additional 200,000-300,000 workers into the higher-rate tax.
However, Treasury sources acknowledged that the new arrangements would not get rid of the anomaly that a family with two parents earning £40,000 each will keep all of their child benefit with a total household income of £80,000, while neighbours where one parent stays at home and the other earns £50,000 or more will lose out.
Overcoming this issue would have involved bringing millions of people into the tax credit system at considerable administrative cost, which was not considered a good use of money, said a Treasury source.
Graeme Crawford, leader of Ernst & Young’s tax practice in the Midlands, said changes to child tax benefit meant a complicated new system.
He said: “Contrary to the Chancellor’s stated aim of simplifying the tax system – this introduces an additional level of complexity to the personal tax system and will increase the number of individuals who will need to complete tax returns. This will, in turn, lead to an increase in bureaucracy to process those returns.
“This is precisely the complex system which the Chancellor claims to be seeking to remove with the removal of the age allowance.”