U-Turn on Child Benefit

Your budget deficit needs you higher rate taxpayer

After initially stating that the Child Benefit system would remain universal, the Coalition Government has now changed its mind and said that it will be means tested.

Why the change of tack?

Answer: To raise an expected £2.5 billion for the budget redress.

Speaking on the changes, David Cameron said it was fair to ask higher rate taxpayers to contribute to the budget deficit reduction. If you’re a higher rate taxpayer (HRT), you may well disagree! Are HRT’s the only people trying to pull the deficit back into line?

The abolition of child benefit during the course of the current Parliament, the removal of nil rate tax bands, increases in taxes for very high earners and restrictions on pension growth and inputs are all ways in which the HRT is helping to reduce the deficit.

Child benefit changes

From April 2013, if a single parent in a family is earning over £43,874, their child benefit allowance is reduced to £0. For a single parent family with 2 children, this will represent a loss in income of £1,760 for the year.

However, a family with 2 parents earning £43,874 or less each will be able to keep their child benefit allowance.

The unfairness of the plan is really for those with 2 incomes close to the HRT bracket being able to keep the benefit. What’s more, the application process for the benefit will also become more onerous with more intrusion from the tax man (the HMRC).

There’s also an issue for people, including many doctors and dentists, who are self-employed or have variable income through the tax year. Should they simply not claim benefit to avoid the worry and hassle of having to pay money back if they find themselves ineligible at the end of the tax year?

Child care changes

The Government will also be decreasing its help with child care costs from 80% to 70%. Yet, the very aim of the Government to have the private sector turn the economy around will not be helped by this change.

Those families who have previously claimed the child care costs benefit have invariably spent the additional money on the niceties of life.

Having less money to spend on non-essential items will inevitably have a knock on effect on the country’s economic recovery, especially when there is some doubt over the savings the child care changes will generate.

So what can you do?

For those with an income just above £43,874, the key is to reduce your taxable income the cut off is based on.

Cutting down the hours you work or making a pension or Gift Aid contribution are two ways of doing this and, of course, there are others.

Article by Ranjit Virk
Independent Financial Adviser at Legal & Medical Investments
December 2010