Child benefit changes lead to 200,000 opting out

The coalition’s changes to child benefit legislation, which comes into effect on Monday, has already seen as many as 200,000 withdrawing from the system.

The changes will put in place an income-related benefit system for the first time. There will now be a lower ceiling for the 15% of higher earners wishing to receive child benefits. 

The other 85% of families receiving the welfare will be unaffected.

The income-related structure means that a single mother who earns £60,000 will lose all benefits while two parents earning £50,000, or £100,000 between them, will still receive all child benefits.

At an income of £50,000, child benefits will now start to be withdrawn from individuals, affecting 320,000 families. They will disappear completely for those earning £60,000, which is estimated to affect 820,000 families.

The sudden withdrawing of families is due to the automatic crediting of the welfare system. As of Monday, those families that haven’t actively opted out of their payments will still receive it, only to be asked for it back at a later date.

The coalition’s policy is said to cut public spending by £1.5 billion from 2013–2014 and it is understandable why the coalition would target higher earners, although certain policy features have been criticised. 

The Institute of Fiscal Studies (IFS), which examined the change, has concluded it will mean a higher marginal income tax for those earning over £50,000.

They found that parents earning £50,000 with one child will have a marginal tax rate of 52.6% or lose 52.6p on every extra pound. Those with three children in this band could lose as much as 62p and those individuals earning over £50,000 with four children will see a tax rate of 70%, as their income is cut with child benefits.

The policy is causing problems because it creates a disincentive for parents to earn over £50,000, as they would only marginally see the extra income. 

The second problem is that the policy has no clause to allow the ceiling to rise with expanding credit. Over time as we earn more, a larger amount of families will hit this band even though their real income has not changed. 

Robert Joyce, who wrote the IFC paper, stated: “Perhaps the biggest concern is the incoherence it creates in the welfare system… It is unclear whether the net effect of all this will be to improve the welfare system.”

Patrick Corby