What should Labour do now about unfair DWP child benefit for high earners?

In his last budget in March, Conservative Chancellor Jeremy Hunt announced a review of the grossly unfair tax on child benefits for high-income earners.

Before March, the highest earner in a household was liable for tax if they earned more than £50,000. This meant that for every £1,000 earned over £50,000, you had to pay back 10% of child benefit. This meant a marginal tax rate of around 60%. And anyone earning £60,000 or more had to pay back the full amount.

This represented an extra £2,000 of tax for a family with two children. Two aspects of the tax were unfair. For one, the threshold had remained at £50,000 since it was introduced in 2013. At the time, £50,000 a year was a pretty decent amount – it was about £10,000 above the highest income tax threshold. But 10 years later, the income tax threshold had risen to £50,000, but the child benefit threshold had not moved.

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While it was called a “high earners” tax, the people paying it weren’t really high earners: they were middle-income families who were doing pretty well, but not rich either. Jeremy Hunt partly addressed this problem in March by raising the threshold to £60,000. He also raised the upper threshold to £80,000, meaning you only have to pay back 5% of any child benefit for every £1,000 you earn over £60,000. Are you still following me? It’s complicated, isn’t it?

The second, trickier, aspect of the tax is that it only applies to the wealthiest member of your household. So, before March, two parents could earn just under £50,000 (a combined income of £100,000) without having to pay the tax at all. But a single-income household earning £60,000 would have to pay the full amount back. It also had an unfair impact on households where one half earned significantly more than the other.

This is where the real injustice of the tax lies, and it has not yet been corrected. The new thresholds set in March helped some families, but the injustice remains. Jeremy Hunt has made clear that the review should fix the problem, but he has conceded that it will be difficult and take time.

The big question is how to create a benefit – or even a tax – that takes into account household income. George Osborne, who created the tax, points out that it would require partners to share their income with each other. So what, you might ask? That may be perfectly normal for some households, but others may be secretive about their personal finances. And they often have good reasons for doing so.