Child benefit reforms are a well-earned tax cut for parents

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The “parent tax” is set to ease up a little from April as long-awaited reforms to the child benefit system take effect.

Child benefit ceased to be a universal benefit in 2013. The system designed to claw it back from families when one parent starts to earn more than £50,000 has caused far too many unnecessary tantrums since then.

Raising that threshold to £60,000 from next month is a rare piece of good news for parents of young children, who are paying some of the highest childcare costs in the OECD. A parent of one child earning £60,000 who receives nothing currently will be entitled to £1,331.20 a year from April, rising to £2,212.60 if they have two children — a very positive step in the right direction.

Of all of the frozen tax thresholds the chancellor could have chosen to thaw, this one has special political significance. One year ago, a £4bn package of childcare reforms was the surprise Budget day flourish from Jeremy Hunt — but accessing extra so-called ‘free’ hours of childcare is proving a challenge.

With just under a month to go until the first phase of his “landmark” reforms, I have received anguished messages from FT readers, colleagues, friends and family members who are finding the promised measures are not easing the squeeze on their family budgets by very much.

The FT reported this week that some nurseries have told parents they simply cannot afford to offer the new measures in full due to funding shortfalls. Other childcare providers will apply an array of surcharges on everything from nappies to lunches to sun cream to get the numbers to stack up. Many are simply increasing their rates — a problem affecting nearly three-quarters of parents recently surveyed by campaign group Pregnant Then Screwed.

The chancellor attempted to soothe concerns on Wednesday by pledging to guarantee funding rates to early years providers for the next two years, something he should have done a year ago.

A doorstep election issue, there is a lot riding on the successful implementation of this policy. The speed of the child benefit changes are an important sop for mid- to high-earning parents, many of whom are paying monthly childcare bills similar in size to their rent or mortgage.

The Treasury had been concerned about moving the child benefit cliff edge to a higher point in the system, but by tapering it away more gradually, the gradient is less steep. From April, the benefit won’t be completely lost until one parent earns over £80,000; a clawback rate of 1 per cent for every £200 they earn above the newly-extended threshold, compared to 1 per cent for every £100 earned at present.

Ministers are concerned that such anomalies in the tax system cause “distorting behaviour” such as turning down work in order to avoid crossing the threshold. But this is not the only way child benefit has warped parents’ personal finances.

Since the child benefit high income charge was introduced in 2013, the number of families claiming the benefit has dropped to an all-time low.

Hundreds of thousands of stay-at-home parents have lost out on valuable state pension credits because they opted out of child benefit — a problem that ministers are at least now trying to fix retrospectively.

Plus, thousands of parents have received fines for not repaying the tax, which has not been helped by low public awareness of the changes and the clunky way of clawing it back via assessment. It has taken far too long to design a system where this can be done via worker’s payslips.

The wider unfairness of a system where two parents could earn £49,999 each and receive child benefit but a single parent earning £60,000 would lose all of theirs is a much bigger tax problem for HM Revenue & Customs to solve. However, it is a very necessary endeavour, given the great number of single parent families who have been cruelly punished by this.

A consultation will now begin on moving to a system based on household income by April 2026. Tax experts note this would be a step back from independent taxation implemented in 1990, before which, a wife’s income would commonly be reported on her husband’s tax return. Some may not be happy about the need for such financial transparency, but given the current struggle to pay childcare costs, my sense is most couples will be relieved to get some extra help.

FT readers caught by the next cliff edge of £100,000 — which is where the personal allowance and entitlement to state help with childcare is lost — wonder wistfully whether this could be the template for future reform. Maybe so, and ambitious reforms to simplify taxes are welcome. However, I suspect their children will probably be teenagers by then.

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Claer Barrett is the FT’s consumer editor and author of the FT’s Sort Your Financial Life Out newsletter series; [email protected]; Instagram @ClaerB.

Join Claer Barrett and guests for a free FT FLIC webinar on The True Cost of Childcare on Fri 8 March 12.30-13.30 UK time. Register here now.