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The UK government should reform “an unfair and complicated” charge that leads to some parents being hit with a 71 per cent effective tax rate, said the former head of a tax simplification body.
Bill Dodwell, who headed the Office for Tax Simplification before it was closed in 2023, called the rules around the so-called high income child benefit charge “crackers”.
Under the charge, if either parent earns £50,000 or more a year, the level of child benefit they can receive per child is tapered down, and if one parent earns more than £60,000, the entitlement falls to zero. Those affected must file a tax return, declare that the amount of child benefit they have received and calculate the amount of the charge they owe.
In a paper published by the Tax Law Review Committee of the Institute for Fiscal Studies think-tank on Wednesday Dodwell, along with former OTS colleagues Patricia Mock and Sally Campbell, said the complexity of the charge was one of several tax issues that need to be addressed urgently.
They calculated that parents affected by the charge faced effective tax rates on the £50,000-£60,000 band of 54 per cent for one child, 63 per cent for two children and 71 per cent for three children.
Dodwell told the FT: “It’s crackers that someone with three children has an effective tax rate of 71 per cent”. He added that policymakers should reform the charge to make it a fixed taper, rather than one that varies with the number of children.
“The variable taper rate is unfair and complicated for individuals to understand,” the paper argued. High tax rates also acted as a disincentive for individuals to work, it said.
Other thresholds in the tax system also posed problems the paper added, including the reduction in the withdrawal of the personal allowance above £100,000 a year and the withdrawal of tax-free childcare when individuals earn more than £100,000 a year.
Similar cliff edges existed on the corporate tax side Dodwell added, including the VAT registration threshold of £85,000, which sometimes acted as a disincentive for businesses to grow.
The Tax Law Review Committee called on policymakers to consider regularly reviewing the tax system which it said was “littered with cliff edges and anomalies”.
Dodwell headed the OTS from 2019 to 2023, but the body was disbanded after a surprise announcement in the Kwasi Kwarteng /Liz Truss “mini” budget, which Chancellor Jeremy Hunt chose to proceed with.
“We all regret that it wasn’t continued,” said Dodwell. “The OTS was particularly good at obtaining external views on tax policy and administration — and it will be much harder now for HMRC and the Treasury to get that level of feedback.”
The Treasury said: “The current threshold for the high income child benefit charge and 30 hours free childcare means that the government can support the majority of families whilst ensuring stable public finances.”
