The limit has not risen for almost a decade, despite inflation and wage growth. The level of the salary cap is so outdated that next year 120,000 families on the basic rate of tax will be forced to pay the charge, even though it was designed to hit only the highest earners, the IFS said.
This is because higher-rate tax became payable at £34,371 when the child benefit cap was introduced, but has increased to £50,720 today. Yet the point at which the benefit clawback takes effect has remained frozen.
This has resulted in around half a million couples opting out of the benefit each year to avoid the hassle of repaying the money via self-assessment tax returns. These parents must still fill in the child benefit claim form but opt not to receive payments, otherwise they risk giving up valuable National Insurance credits that count towards their state pension.
This has the potential to leave them thousands of pounds worse off every year in retirement.
Sir Steve Webb, a pensions minister under David Cameron and now of consultants LCP, said the Government was raising extra revenue through taxing families by “stealth”.
He said: “The child benefit charge is hitting more and more families every year. It is more than eight years since the charge was introduced, yet the income threshold where it bites has been frozen since then and looks set to remain frozen for years to come.
“This means that a tax originally branded as applying only to those on high incomes is increasingly hitting ordinary working families, including some who only pay tax at the basic rate.”
Sir Steve added that this would be felt particularly keenly now that the cost of living had risen so dramatically. “More and more families are set to be dragged into the net of this so-called high income charge. Household budgets are already under growing pressure with rising inflation and this stealth tax will make matters worse,” he said.
Perversely, some of the biggest earners will escape unscathed. This is because the benefit cap is based on the income of the higher earner. A couple each of whom earns a fraction less than the £50,000 cap, and who therefore have a combined income of almost £100,000 a year, will still get the full handout, while a family in which one partner earns £60,000 and the other has no income will get nothing.
The IFS said the freeze to the cap was “clearly designed to increase taxes in a less visible way” and was “eroding trust in government”.
A spokesman for the Government said the child benefit limit was intended to ensure that support went “to those who need it most” and added that it was spending £4.2bn to alleviate the cost of living burden, such as by freezing fuel and alcohol duty.
