We are now only days away from away from what is likely to be Chancellor Jeremy Hunt’s final Budget and pressure is mounting on him from many sources, starting with many of his fellow tory MPs, to get rid of most if not all, unfair elements of the current UK tax system.
Arguably, the tax measure which pretty much every accountant and most MPs, agree is grossly unfair is the high income child benefit charge (HICBC, nicknamed “hick-bick”. Even Chancellor Hunt himself has admitted that there is an unfairness in the structure of the HICBC and has described it as “a prime example of a tax barnacle”.
The Chartered Accountants body has called it a “legislative thorn that causes so much pain to many families”, a “tax trap” by Tax Policy Associates founder Dan Neidle; and “perverse” by Conservative MP and chair of the Treasury Select Committee Harriet Baldwin. So why is it still with us?
Scraping HICBC – the basics of the measure
If the higher earner in a couple, or the parent in single parent household, has a net income of more than £50,000, their child benefit entitlement begins to be clawed back. Once they reach £60,000, child benefit will have been entirely lost because of additional tax.
This is very unfair when compared to the many others, who have income sources that total more than £50,000, but because it is structured differently, they do not pay the charge. For example, a couple where both partners have £49,000 each will receive the full child benefit, while a family where one parent earns £55,000 and the other nothing, or where a single parent earns £55,000, will not receive a penny.
This leaves single parents and families with greater care responsibilities significantly worse off. Taxpayers are required to self-assess their liability to the HICBC and complete a tax return. Unfortunately, many do not realise they have been dragged into the charge because of fiscal drag (see last week’s Blog) meaning they are hit with unexpected penalties when they fail to pay.
Scraping HICBC – Possible solutions to fixing it
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Raise the threshold in line with inflation – When it was introduced in 2013, the HICBC was designed to affect only higher income taxpayers. The higher rate of 40% applied to income above £34,470 in 2012-13, with the HICBC clawback beginning at £50,000. This meant that only those in the higher tax bracket would be required to repay their child benefit. The clawback threshold has remained at £50,000 despite rising wages and cost of living due to inflation, thus dragging millions of basic rate taxpayers into the HICBC.
Indeed, BBC Verify have calculated that HICBC affected less than one million families when it first came in, but now, due to the 40% threshold being frozen for a decade, this has now risen to just over 2.5 million families and is set to rise rapidly as tax thresholds are being held at their current levels for at least two more years.
The Association of Taxation Technicians have pointed out, this is “directly contrary to the original policy intent announced in the Spending Review in October 2010, which stated that the charge should only affect families with a higher-rate taxpayer”. They consider that the income threshold at which clawback begins should be uplifted to £67,100, based on the BofE’s inflation figure since 2013. If implemented, this would mean that you would have to earn £80,500, to lose all benefit.
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Match the HICBC threshold to the income tax bands – If Mr Hunt considers that increasing the clawback threshold in line with inflation is too big a dent in the public purse, another suggestion is to raise the point at which clawback begins to align with the income tax threshold for higher rate tax, currently £50,270. This would ensure that basic rate taxpayers would not fall foul of the HICBC.
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Increase the limit for single earners – One way to make the system fairer, would be to address the disparity between single and dual parent households. This could be achieved by increasing the threshold for single earner families and reducing the combined earnings limit for couples. The downside unfortunately, would be to add an additional layer into a tax measure notoriously plagued with complexity.
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The nuclear option – The nuclear option is of course to scrap Hick-bick completely. This is by far the easiest and most effective solution to the issue. Unfortunately, it is also by far the most expensive for the Treasury, making it regrettably the least likely outcome.
Tax Accountant’s view
This week’s Blog on HICBC, or as accountants call it “hick-bick”, is a subject that I haven’t written about before, largely because I considered it a fringe tax only affecting a relatively few individuals. It was only when reading a post on BBC Verify that I was shocked to read that it affected 2.5 million families, roughly 10 million of our population in total.
Given that Chancellor Jeremy Hunt’s fiscal manoeuvring room is extremely limited, I do not expect him to plump for the nuclear option, but he really does need to do something. Perhaps opting to increase the clawback threshold by a few thousand and stating that it was the government’s intention to move to matching the threshold with inflation over a number of years might just squeeze through!
This would be a potential win-win option for Mr Hunt and something he might consider because it would probably be applied from 6th April 2025 and it’s likely it would then be Keir Starmer and Labour’s problem.
