At yesterday’s Conservative Party Conference, Chancellor George Osborne announced significant changes to the welfare system which will see higher-rate taxpayers lose their eligibility for child benefit.
Details are still emerging but here is a guide to how the changes announced so far will affect you.
What is child benefit and who is currently eligible?
Child Benefit is a tax-free payment you can claim for your child. We’ll come to the changes later, but HM Revenue and Customs (HMRC) states that you may be eligible for Child Benefit if any of the following applies:
- Your child is under 16
- Your child is over 16 and in education or training that qualifies for Child Benefit
- Your child is 16 or 17, has left education or training that qualifies for Child Benefit and is registered for work, education or training with an approved body
You can get Child Benefit even if your child doesn't live with you. However, if they live with someone else, you can only get Child Benefit if:
- You pay towards the upkeep of your child
- What you pay is at least the same as the amount of Child Benefit you get for your child
- The person bringing up your child is not getting Child Benefit for them - if you and another person both claim Child Benefit for the same child, only one of you can get it
You can also claim Child Benefit for a child even if you're not their parent, but you have to be legally responsible for them to qualify.
How much is it worth?
Payments are £20.30 a week for your eldest or only child and £13.40 a week for each subsequent child. That means a family with two children get £1,752 a year at present*.
How and when is it paid?
Child Benefit is usually paid every four weeks, but can be collected weekly if your are receiving welfare payments such as Income Support, income-based Jobseeker’s Allowance or Employment and Support Allowance, Pension Credit or if you are a single parent.
What changes are taking place to Child Benefits?
Traditionally, Child Benefit has been a universal benefit – in other words, anyone can claim it if their child meets the criteria, no matter what they earn. However, the chancellor’s announcement means that, from 2013, the benefit will be cut for all households where one or more parent pays the higher rate of tax. In other words, any parent earning over £42,375 will lose out.
Some commentators have described the change as unfair, as it could potentially punish households where one parent stays at home. For example, a family living on one parent’s income of £45,000 will see their right to Child Benefit withdrawn, while two parents earning £40,000 each would be entitled to keep it.
The Conservatives admit that the anomalies are unfortunate, but claim that the cost of creating a new system for means-testing the benefit would not be cost-efficient at a time when the government is tasked with scaling down the nation’s budget deficit.
Is there any way of avoiding the cut?
Some higher-rate taxpayers could potentially avoid the cut by reducing their official net income. While this doesn’t sound wholly attractive at first, it’s not quite as bad as it sounds.
If you earn marginally above the limit, paying extra into your pension could reduce the amount of income you are taxed on. For example, if you earn £45,000, contributing £1,500 into a pension pot will reduce your taxable income to below the higher rate, allowing you to keep hold of the Child Benefit.
Equally, you can receive tax relief on contributions to charity through your payroll – find out more about giving to charity through your payroll or pension on the HMRC website.
*All details correct on 5 October 2010
