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Stealth tax forces one million parents off child benefit

Childcare
Childcare

More than a million parents have been forced out of receiving child support because of a stealth tax on middle-class families.

The number of families claiming child benefit has fallen to a record low, as middle-class parents stop taking payments to avoid the High Income Child Benefit Charge (HICBC), HM Revenue & Customs figures show.

Since the levy was introduced in 2013, the number in receipt of child benefit has plummeted from eight million to seven million today, while the number opting out of the benefit altogether has risen every single year.

It comes as parents face record high childcare costs and risks women being left worse off in retirement, experts warned.

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The tax charge means that once a parent earns over £50,000, child benefit is clawed back at £1 for every £100 earned above this threshold. At £60,000, they must repay the benefit in full.

Since 2013, more than 180,000 parents have been fined for failing to pay the tax on time, many of whom had no idea they had to pay the child benefit back.

The threat of the charge has seen the number of parents claiming child benefits fall by 43,000 year-on-year.

On top of this, the £50,000 threshold has not moved since 2013, dragging more parents into the trap as wages have risen in an effective stealth tax raid.

Had it increased with inflation, the threshold would be worth £65,000 today, according to brokers AJ Bell.

Sarah Coles of investment firm Hargreaves Lansdown said: “The fact the threshold hasn’t moved in a decade means more and more families are being hit by the charge, including thousands of basic-rate taxpayers. This isn’t just costing families money now, but could end up taking a serious toll in retirement too.”

This is because a major advantage of claiming child benefit is the National Insurance credits attached to them. A decade of NI credits is required so a person can access the state pension by the time they reach state pension age. In order to qualify for the full state pension, a person must have 35 years on their NI record.

Claiming child benefit can help those who have dropped out of the workforce in order to care for their children. A growing number of parents are being forced into this position as childcare costs spiral. One in four parents have quit work or left education because they cannot afford childcare, according to new research from global children’s charity Theirworld.

Nimesh Shah of accountancy firm Blick Rothenberg said the child benefit tax was one of his biggest frustrations with the personal tax system in the UK.

“Following the introduction of the high income child benefit charge in January 2013, thousands of affected families have not claimed child benefit – but this is a mistake to maintain national insurance credits for state pension,” he said.

HMRC's data show that 683,000 families opted out of receiving payments in 2022, an increase of 5pc year-on-year. These parents did not want to risk the tax charge, but still got the NI credits.

This makes sense if they earned over £60,000 as these parents would be ineligible for any child benefit. But if they were all eligible, they would have missed out on £1.2bn in financial support, according to AJ Bell.

Parents and carers with children under 16 can claim £21.80 per week (around £1,130 a year) for the first child and £14.45 a week (£750 a year) for younger children.

The huge drop in child benefit claimants comes at a time when parents are in serious need of all the financial help they can get. Childcare costs in Britain are among the most expensive in the world, according to data from the Organisation for Economic Co-operation and Development.

Chancellor Jeremy Hunt has extended a scheme offering 30 hours of free childcare for three- and four-year-olds so now those between nine months and five years of age will be eligible for support. However, the expansion of the scheme will not come into effect in full until September 2025.

Laura Suter of AJ Bell said: “The government announced additional childcare support for younger families in its latest Budget, but this will take years to roll out, leaving hundreds of thousands of families without the money they need to afford adequate childcare or stay in the workforce. A simpler move would have been to increase the high income threshold in line with wage growth, to ensure more families aren’t locked out from claiming.”

A spokesman for HMRC said: “Child Benefit is an important source of financial support for millions of families across the UK, and we encourage all families, regardless of income, to claim it to ensure they receive the benefits to which they are entitled.

“For those on higher incomes who are subject to the High Income Child Benefit Charge (HICBC), we have made the process as simple as possible, and clear information can be found on the front page of the Child Benefit claim form on GOV.UK.”