Warning for thousands of parents facing higher tax rates of up to 96% – are you one of them?
THOUSANDS of families face a hit to their finances due to complicated Universal Credit and Child Benefit rules.
If someone in the household earns more than £50,000, the High Income Child Benefit Charge kicks in.
It means you start to lose the cash the more you earn, and get nothing at all if one parent earns over £60,000.
But at the same point, some families also see their Universal Credit payments begin to be withdrawn.
They are entitled to Universal Credit on earnings above £50,000 if they have high housing costs, or get help with childcare costs.
The clash of rules will leave around 50,000 families paying an effective tax rate of as much as 96%, new calculations from the Resolution Foundation show.
The think tank warned that a collision between the two systems has led to the “highest marginal deduction rates in the UK” – 80% for families with one child, 83% for those with two children, and 87% for three children.
Taking into account student loan repayments and pension contributions, the rates could rise as high as 96% for three-child families.
Income tax rates are currently set at 20%, 40% and 45%, depending on how much you earn.
The new figures include the deductions when Child Benefit and Universal Credit are taken away too.
The number of families affected – those earning between £50,270 and £60,000 – could nearly double to 90,000 by 2030.
A further 250,000 people earning between £40,000 and £50,000 could also be pulled into the harsher tax rules if they get a pay rise, the think tank warned.
Karl Handscomb, senior economist at the Resolution Foundation said the system is a “mess that needs cleaning up” and “creates huge complexity and disincentives for these workers to seek higher pay”.
He said: “It is not the super-rich that have the highest effective tax rates in the UK, but some families with children.
“Growing numbers are facing effective tax rates of 80% and above next year, as the UK’s two policies for supporting children collide.”
But he added that the Government faces “significant challenges” fixing the problem as a solution is likely to be costly or could hit people’s finances.
The Child Benefit thresholds have been frozen since 2013.
It means 600,000 families who lose some or all of the benefit are paying an effective tax rate of at least 55% already.
For families with two kids that’s 63% and 71% for three.
What is the Universal Credit taper rate?
The Universal Credit taper rate affects those claiming the benefit who are also working but are on low incomes.
The taper reduces the amount Brits get by 55p in every £1, over a certain amount.
It kicks in once claimants are earning above the Work Allowance, if they are eligible.
In what was a huge win for The Sun’s Make Universal Credit Work campaign, Rishi Sunak slashed 8p from the hated in-work penalty last year.
You get a Work Allowance if you (or your partner) are responsible for a child or have limited capability for work.
How much it is depends on whether you claim the Housing Costs element of Universal Credit.
The monthly Work Allowance is set at £344 if your Universal Credit includes Housing Support, and £573 if it doesn’t.
So you’ll lose 55p of your maximum Universal Credit award payment for every £1 over the Work Allowance.
The taper rate is applied to your Universal Credit payments automatically and you should be able to see the deductions on your account.
The taper rate puts thousands of claimants off applying for better paid jobs or taking on more hours.
The Sun has been calling for the government to increase the allowance and reduce the taper rate, as part of our Make Universal Credit Work campaign.
What is the High Income Child Benefit Charge?
If either parent is earning over £50,000 they have to pay the high income child benefit tax charge.
This means you pay back 1% of your child benefit for every £100 of income over this amount.
Once you reach £60,000 of income you have to repay the full amount.
The reduction applies when just one parent or guardian earns more than the threshold, and not on combined household earnings.
Parents have been caught out by the complicated rules and extra charge and have been landed with bills for thousands of pounds.
It’s up to parents to notify HMRC if they are liable for the charge and they must file a self-assessment tax return to pay it.
Parents who do know about the charge could also end up missing out on cash.
They can decide to opt out of getting the benefit altogether to avoid having to pay money back. But they will miss out on National Insurance credits.
These fill gaps in NI contributions when not working, and count towards how much state pension you get in retirement.
You can see a full list of benefits that are staying the same in our round up here.
Likewise, you can read the list of changes taking place from April here.
Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk