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Family incomes under pressure

One of the measures adopted by the Coalition Government to reduce public expenditure and cut the deficit is means testing Child Benefit as from January 2013.

Notices from HMRC have hit door mats this week and will cause concern in some homes.

Child Benefit dates from 1977 but its real origins lie in 1946 when Family Allowances were created. Child Benefit was designed as a tax free payment for all parents with a child under 16, or under 20 if the child is in education or training. It is normally paid directly into bank accounts every four weeks, but can be paid weekly in certain circumstances. The current rate of Child Benefit is £20.30 per week for the first child and £13.40 for each additional child.

The new measures, to be introduced next January, will make no difference to households in which neither parent earns more than £50,000 p.a.  For households in which one parent earns between £50,000 and £60,000, the benefit will be reduced by 1% for every £100 earned above £50,000. The benefit will still be paid in full but clawed back in the income tax deducted from that income. Those earning £60,000 or more will receive no Child Benefit.

The ‘cliff-edge’ nature of this change has been controversial because households in which two parents each earn £49,999 pounds each remain eligible for the full Child Benefit. However, a poll commissioned by the Chancellor of the Exchequer revealed that 82% support the policy of means testing Child Benefit and 74% of those earning more than £69,000 also supported the change.

This new austerity measure is expected to affect the wealthiest 15% of households, which could be £2,450 worse off, the equivalent of a £4000 pay cut. A technical problem with the new measure is that it may infringe EU rules. Families from EU member states resident and working in the UK and earning more than £50,000 p.a. will not have any benefit paid by their Government clawed back by the UK tax system. This could be construed by the EU as discrimination against those British citizens affected by the new measure.

More controversial is a suggestion from the Work and Pensions Secretary that Child Benefit should only be paid for two children in a household. Mr Duncan Smith seems to be suggesting that the number of children a couple choose to have should relate to their means. The austerity measures have been made necessary because lots of households have used credit cards to live beyond their means and accumulated excessive debts. The Government also contends that as a society we have demanded levels of public spending that could only be funded by borrowing that has to be repaid, if not now by ourselves, then later by our children’s generation.  Critics will question whether this means a Government policy of two-child families similar to China’s one child policy but he will respond that all he wants is that we all live within our means.