The new coalition government is implementing one of the biggest changes to be made to child benefit in the UK since it first began. It plans to cut the benefit for the children of parents who are in the higher tax bracket - 40%. On the surface it seems straightforward enough. If you are in the higher tax bracket you won't receive child benefit. If you aren't in the higher tax bracket you will.
But nothing's ever that simple is it? Here's the PlayPennies low down on how the cut to child benefit in the UK might affect you and what it all means.
When and why?
The changes will come into effect in April, 2013. So you've just over two years to prepare for the changes. Reports vary a little on just how much money the government is going to save with this change. The initial estimate had the cut affecting 1.2m families, with a saving to the government coffers of £1bn. More recently, reports have revised this to 1.5m families and a total saving of £2.5bn.
At the moment, all children receive child benefit, no matter how much their parents earn. That is, all children aged under 16, or 19 if in full-time education. Child benefit rates are £20.30 per week for your eldest child, and £13.40 for each additional child. A family with two children gets £1,752 a year.
The cut will affect people who are in the higher tax bracket. Earlier this month, Richard Wachman explained it like this in the Guardian. "As a result, a single parent earning more than £44,000 a year will be up to £1,750 a year worse off, according to chartered accountants Blick Rothenberg. If two parents individually earn £43,000, contributing family income of £86,000, the family will continue to receive child benefit."
Yes, you're reading it right. The cut is based on individual income, not on household income. It seems vastly unfair to apply a cut to a household earning £44K, and not to a household earning £86K.
The prime minister has justified this decision on breakfast TV. Cameron said that means testing income for the child benefit would be "incredibly bureaucratic and expensive and, frankly, quite intrusive". He hasn't said why household income, currently used for other benefits like jobseekers allowance, isn't as good a measure as individual income though.
For this reason, the cut to the child benefit in the UK has come under a lot of criticism. But for the time being, that's how it stands.
OK, so far so simple. Right? Now for the not-so-simple bits.
First, how much do you stand to lose exactly? According to the Institute for Fiscal Studies, Britain’s leading independent economic forecaster, a single-income couple with two children and an income of £43,875 (just under the 40p tax threshold) will need a pay rise of £2,975 or more to ensure they are no worse off after losing their child benefit.
Now, if both parents live together (regardless of whether they are married or not married), and one earns above the threshold then neither will receive child benefit.
If the parents are separated it gets a little more tricky for the married ones. If you're separated but not divorced, and the non-resident parent earns more than the threshold, then it is highly probable that neither will receive child benefit.
What if both parents live together, but aren't married? You're treated exactly the same as married couples. If either mum or dad earns within the higher tax bracket you won't get child benefit. Now, what if you're married but not living together? According to the Daily Mail, reporting from the Tory Party conference earlier this month, "if they are divorced and the parent who has custody is a lower-rate taxpayer, he or she would still receive child benefit, regardless of any maintenance arrangements."
Although the government has made a bit thing about this being less bureaucratic, easier to manage etc, it seems to be conveniently forgetting the self employed. How will it work in this instance?
If you pay tax by self-assessment as self-employed and freelance workers do, then you'll have to declare whether you receive child benefit on your annual tax return. If you earn more than £43,875 you'll lose the benefit, and be required to pay back any benefits you have received during that year.
Will you lose your pension?
If you're a stay-at-home mum or dad then without a change in the law, this could have a very nasty long-term effect on your state pension. Caroline Crampton points out in her blog on the New Statesmen that since the 6th of April 2010, a new 'credit' system has been in place to ensure that time taken out of paid employment to care for a dependant isn't unfairly deducted from your state pension. She says "the criteria for receiving the new "carer's credit" is unambiguous: you are eligible if you receive "Child Benefit for a child under 12 years of age", are a foster carer, or care for a disabled person for at least 20 hours a week."
So if your partner earns £44K, and you are staying at home to look after the children, as the law currently stands you could find your state pension reduced when you retire.