There’s been a certain amount of confusion on Twitter this evening (partly helped along by me, alas) as to how the child benefit cuts will work. George Osborne announced yesterday that, rather than people losing the whole of their child benefit if one parent earns more than ~£40,000, now child benefit will taper down for earnings between £50,000 and £60,000.
HMRC have published an FAQ on this, which caused some confusion through its use of the phrase “net income” – leading some (including me) to think it meant net income after income tax. However, a more detailed technical note (PDF) explains what this term means:
The measure of income that will be used will be the individual’s adjusted net income. This is an existing method of determining an individual’s income and is currently used to work out entitlement to personal allowances for someone aged 65 or over or who has income over £100,000.
Adjusted net income is calculated in a series of steps. The starting point is “net income” which is the total of the individual’s income subject to income tax less specified deductions, the most important of which are trading losses and payments made gross to pension schemes. This net income is then reduced by the grossed-up amount of the individual’s gift contributions and the grossed-up amount of the individual’s pension contributions which have received tax relief at source. The final step is to add back any relief for payments to trade unions or police organisations deducted in arriving at the individual’s net income. The result is the individual’s adjusted net income.
See? Almost too simple.
The other aspect is how the clawback will work. Rather than actually means-testing child benefit, it sounds like child benefit will continue to be paid in full, but then there’ll be an additional tax charge for the partner who is earning over £50,000, to claw back some or (if they are earning over £60,000) all of the benefit paid.
Which means those who are affected will now (a) have to complete a tax return, if they didn’t already (oh, joy!), and (b) if earning between £50,000 and £60,000, face a marginal tax rate of 50% – which apparently was too much for those earning above £150,000 to bear without fleeing the jurisdiction. Sadly, a “net income” of £50,000 to £60,000 won’t buy you much of a Swiss bolthole.
Also, it’s not clear to me how the tax charge will be payable. On the face of it, it sounds like affected taxpayers will have to dip into their pockets to find the money to pay back the previous year’s child benefit – a cool £2,500 if (to choose a random example) you have three children. Though I assume that after that it can be run through PAYE for future years, and for the current tax year it’ll only be the last three months’ child benefit that is clawed back. Still quite a shock to the system for those who find themselves caught in the taper by a promotion or a pay rise.
If this makes you think “total shambles and/or huge political row waiting to happen”, well, you’re not the only one. Even if, admittedly, those who are affected by this are less in need of people’s sympathy than those hit by the spiteful cuts to working tax credits.