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Great news for parents: the long-loathed child benefit tax trap is finally being fixed. Or at least it might be, following a two-year consultation announced by the Chancellor in Wednesday’s Budget into how HMRC collects our data.
In a move seen as radical by some tax experts and dangerous by others, Mr Hunt wants the taxman to be allowed to move to a new “household-based” system, which instead of assessing individual salaries for child benefit purposes would – for the first time in decades – group parents’ salaries as one.
Changes to the child benefit system were long overdue as its flawed design creates deep unfairness between families.
Even after Mr Hunt used his Budget to significantly lift the salary thresholds at which parents start to lose their benefit entitlement, it means two parents both earning £59,000 a year (£118,000 combined) can receive the full £1,000-a-year per child benefit while a single parent on £81,000 (£37,000 less than the couple) loses the benefit in full.
This is because child benefit starts to be withdrawn when one parent earns a penny over the £50,000 threshold. Above this amount they start to pay a so-called “child benefit income tax charge”, which ramps up until their salary hits £60,000, at which point they will receive no child benefit at all.
The system simply isn’t fair because it penalises single parents, and families where there’s one clear breadwinner just over the threshold, and one much lower earner.
Under the new “household tax” system this unfairness would, in theory, be removed. Instead, the overall joint incomes of parents would be used to calculate benefits. On face value, this seems like an absolute no-brainer and great showcase of common sense. Three cheers for Mr Hunt!
But not so fast. Underneath the surface, it is likely to be messy. How would the “household system” assess separated parents not living together, those living with a partner’s children, or adult children still living at home and earning a salary, for example? Presumably Hunt thinks this will all be nicely ironed out in the consultation, that is, if it doesn’t get squashed by a future government.
The last time HMRC was allowed to group adults within a household together was in 1990, when it required a wife’s income to be declared on her husband’s tax return. It meant that men knew exactly how much bacon their wives were bringing home, while husbands could be squirrelling away secret sums of money without their wives being any the wiser.
This systemic and outrageous sexism will seem shocking to today’s generation of working-age women, but no-one is suggesting this latest policy will mean a return to gender-based injustice. Instead, it could have a profound effect on all taxpayers’ rights to financial confidentiality.
A return to household-level taxation, as Mr Hunt wants, raises real concerns over disclosure of earnings within couples. Not all partners know how much each other earns, and tax experts say financial secrets within couples are more common than most people realise.
Sometimes there are good reasons for this, such as where one partner is abusive or controlling, meaning having a secret fallback fund may be necessary for survival.
The fear is that under household-level taxation, where benefits would be automatically distributed based on both partners’ salaries, taxpayers’ financial secrets may be inadvertently revealed to their partners, potentially causing great harm.
So if what seemed like a sensible fix will just add more complexity and a different set of serious problems, then why bother, I hear you ask?
Well, it’s a very good question. But then why bother announcing a 2p cut to National Insurance before briefing media outlets that the tax be scrapped altogether just hours later?
It seems Mr Hunt knows what we are all thinking – the British tax system is one almighty mess and needs completely ripping up and redesigning from scratch.
Problem is, he’s either too scared or lazy to just get on and do it. It should and could have happened years ago. But with a general election now looming around the corner, poorly considered solutions to tax quirks caused by layer upon layers of Tory tinkering, simply fail to inspire.
Bolder moves were needed on Wednesday to show the public that our tax system is anything other than a total disaster. What a shame they didn’t come.
Jeremy Hunt’s new ‘household tax’ could expose your financial secrets
Underneath the surface, the pooling of partners’ benefits is likely to be messy