For the benefit of all?

Posted in: Finance Last updated: 02 Mar 2012

The role of welfare benefits in our society has been well and truly dissected over the past few months, as the press analyse the coalition government’s Welfare Reform Bill and the impact starts to bite. With the country’s bank balance deep in the red, cutting back on welfare payments has been a major focus for the government in its bid to reduce the national deficit.

Cut to child benefit

Among the welfare cuts is child benefit. As one of the few remaining benefits not means-tested, its abolition for top earners is affecting many in the country not normally troubled by welfare changes unless they suddenly find themselves sick or jobless.

You know times must be bad for child benefit to be tampered with. This benefit – worth £20.30 per week for the first child and £13.40 for each subsequent child – doesn’t come close to covering the cost of looking after an infant but its role as a safety net, one ensuring that no matter what else was changing this benefit could be relied on to help support a child, has been sacrosanct until now. While it is paid directly to the parent most responsible for the child’s care, this is most typically the mother and for some relationships it ensured access to money where control of finances could be a battleground.

But in these straightened times, allowing someone earning £150k to draw a benefit in the same way as someone on £15k was no longer seen as palatable. Despite fears in Tory ranks that this reform would be a vote-loser, George Osborne, Chancellor of the Exchequer, has said it will be removed for higher rate taxpayers and intends to flesh out the policy in the next few months.

Link to household income

So anyone earning more than £42,475 a year, with kids under the age of 16 will lose their child benefit. But one of the great conundrums with welfare reform is the way it is out of kilter with taxation. We are taxed as individuals but benefits are paid as households. So under these changes a household with two earners on £40k would still get child benefit, while a household with one earner on £43k would get none.

"You know times must be bad for child benefit to be tampered with."

While politicians from both sides have talked about the ‘unfairness’ of this situation, and some leapt on the idea that a U-turn was in the offing, Osborne has made no such promises. However the House of Lords did vote for an amendment to the bill, so that the £26,000-a-year benefits cap would not include child benefit.

The argument put forward by the peers supporting this amendment was that imposing the same cap on all households, regardless of how many children they had, would penalise the kids.

But for those earning and teetering on the edge of the higher tax threshold, ensuring their income falls below the higher rate if they have children, so they continue to be eligible for child benefit suddenly seems appealing.

Upping pension contributions

Some have suggested it would be better to top up pension pots so they keep hold of the child benefit – the equivalent of £1,750 a year for a family with two children. Upping pension contributions directly from wages may provide a means for some families to boost their retirement funds while ensuring they remain below the 40% tax threshold and remain eligible for child benefit.

Whether this is a viable option will depend on one’s circumstances. But what is certain is that – as is always the case with anything means-tested – it will be those families caught on the cusp of the tax bracket that feel the greatest effect. For a family with two kids earning £100,000+ losing £1,750 a year may be inconvenient, but for the family on £43,000 it could lead to very anxious times.

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