The government announced that child benefit will be taken away from higher rate taxpayers in order to show that we really are all in this together. But linking child benefit to the income of the main earner, rather than to household income, has odd effects. A family with two earners, each just below the higher rate threshold, will not lose out. In contrast a family with one earner just above the threshold will lose out, even though the family are not as well off. The sums involved – £2,500 a year for a family with three children – are large.
The best approach would be to integrate child benefit and the child tax credit system. A threshold – of, say, £45,000 household income – would apply whether there are one or two earners. Child benefit would be withdrawn steadily after that point. The downside is that people with household incomes above this point face high marginal rates of tax and child benefit withdrawal combined. This would not affect the financial yield.
The second best solution would be to withdraw child benefit only for the first child if there is one higher rate taxpayer
in the household, and from all children if the family has two higher rate taxpayers, or one earner on more than £75,000. The downside to this plan is that it reduces the yield from limiting child benefit. Rather than raising around £2.4bn, the policy would then raise £1.8bn. £1.8bn in the hand may be better than £2.4bn in the bush