Basic rate taxpayers will pay the United Kingdom’s high-income child benefit charge starting in April unless the £50,000 threshold is increased, the Low Incomes Tax Reform Group (LITRG) warned.
In a budget representation on January 14, the group repeated its call for the threshold to be increased to £60,000, and for the income level at which the child benefit is fully withdrawn to be increased from £60,000 to £75,000.
The £50,000 threshold has remained unchanged since the charge was implemented in 2013. In a December 2019 submission, LITRG had pointed out that the charge involves complex interactions between tax and welfare benefits law and can have unforeseen consequences for families.
LITRG said it recognizes that the March 3 budget will be “of critical importance” as the United Kingdom continues to tackle the economic and public health impact of COVID-19. Amid speculation that tax rises will be required to shore up public finances, it urged the government to examine the charge, which increases each year “as a result of fiscal drag.” The group also called for changes to ensure that low-income taxpayers do not lose National Insurance credits “as a result of not claiming child benefit where the charge is applicable.”
The government said at the November 2020 spending review that the income tax personal allowance will be increased in April, in line with inflation. “As a result, the higher-rate threshold for 2021-2022 is set to be £50,270. This means that basic rate taxpayers, for the first time, will be affected," LITRG said. "This is directly contrary to the original policy intent of the [charge] announced in the spending review 10 years earlier, which stated that the charge should only affect families with a higher rate taxpayer.”
“Despite its name and the fact that the charge itself applies to the partner with the higher adjusted net income, the way the [high-income child benefit charge] operates has consequences for the whole household, including the partner with the lower income and the child,” LITRG said, adding that it would be “sensible for a review of the policy to be carried out to assess if it is working as intended and whether it meets its original objectives.”
A Simpler and Fairer Tax System for Charities
The Charity Tax Group has called on the government to “design a tax system in the light of COVID and Brexit that maximizes the valuable impact of charities (seen so clearly during the pandemic) and does not undermine it.”
In a January 15 release, the group recommended that “as a minimum, existing charity tax reliefs should be protected and tax compliance and administration should be simplified." COVID-related support measures have helped many charities and should be continued “where possible while lockdown restrictions continue,” it said.
The group suggested that “core tax policy issues” facing charities should be addressed by reviewing structural distortions in the VAT system that result in significant amounts of irrecoverable VAT; protecting the present business rates relief for charities; and considering a temporary increase in the value of gift aid, and taking steps to ensure that the gift aid system is fit for the digital age.
It is sometimes assumed that tax reliefs received by charities are “simply government expenditure that could simply be redistributed,” the group said in a joint September 2020 submission to the House of Commons Treasury Committee’s tax after coronavirus inquiry. “However, there is a strong and long-standing rationale for many tax reliefs, and it is important that in reform of the tax system, key principles are not undermined, e.g., the principle underpinning donor reliefs is that individuals should not pay tax on income given away to support charities delivering public benefit.”
Charity reliefs from VAT, business rates, corporation tax, and other taxes "follow similar principles that money that is used to generate public benefit should not be subject to tax,” the group added. In supplementary evidence submitted in December 2020, the group highlighted “the importance of existing VAT reliefs and exemptions for the charity sector, against a backdrop of calls for a widening of the VAT base both in response to Brexit and to pay for the cost of the COVID-19 pandemic.” (Prior coverage of Brexit.)