Tax Child Benefit - and reduce child poverty at the same time

Child Benefit is likely to be one of the key areas of spending targeted by the new government as it looks for ways to tackle the deficit. But ippr argues that simply cutting it is not the answer. Instead ippr recommends increasing Child Benefit to £22 a week for all children, but off-setting the cost by taxing this higher rate. This would reduce the value of Child Benefit for middle and higher earners while giving a boost to the incomes of poorer families.

ippr estimates that increasing Child Benefit to £22 and making it taxable could lift a further 350,000 children out of poverty. There were approximately 2.9 million children living in poverty in 2007/08, with the figures for 2008/09 due for release today. The Child Poverty Act 2010 commits the government to ending child poverty by 2020.

Carey Oppenheim, ippr Co-Director, said:

"Child Benefit is rightly one of our most popular benefits but in the face of austerity, no public spending can simply continue without scrutiny.

"However, the new government should not simply use the enormous deficit as a reason to cut spending across the board. Our analysis shows that the value of Child Benefit can be reduced for those on middle and higher incomes, but using some of the savings to boost the incomes of the poorest families could help to tackle our shameful levels of child poverty.

"Creative thinking in times of national austerity could help to ensure that we continue to deliver progressive goals, which will be the real test of our new government."

ippr argues that taxing Child Benefit may be preferable to introducing a means test because means-tested benefits tend to suffer from lower take-up rates. Child Benefit currently has a take-up rate of around 98 per cent and retaining it as a universal payment could also help to maintain public support for Child Benefit and for the wider welfare system.

Under our proposals, a family with two children and earnings below £6,475 would be £10.30 a week better off. A family paying basic-rate income tax and with two children would be £1.50 a week better off, but a two-child family paying higher rate tax would lose £7.20 a week.

Government currently spends around £11 billion a year on Child Benefit, making it the third most expensive benefit (excluding retirement pensions). ippr's proposal to increase the rate paid to all children and then tax the payment would result in an overall increase in the Child Benefit bill of approximately £700 million. However, in order to deliver a cost-neutral package of changes to financial support for families with children, the new government could also consider removing eligibility to the Child Tax Credit from around 2 million families with incomes of more than £27,500.

In summary, the three elements of ippr's proposed reform package are:

1. Tax Child Benefit
2. Increase Child Benefit to £22 for all children
3. Remove eligibility to Child Tax Credit from those families who are currently only eligible to the Family Element of CTC.

Each of the three elements could be implemented separately. Taxing Child Benefit without raising the rate could generate significant savings, which could be used to help reduce the deficit. However, this would not generate any reduction in child poverty and could in fact lead to an increase in child poverty.

Notes to editors:

1. Child poverty estimates and costings were calculated using the ippr tax-benefit calculator.
2. The ippr package also includes removing entitlement to Child Benefit from young people age 16 or over where household income is over £25,000.
3. Child Benefit is currently worth £20.30 for a first child and £13.40 for all subsequent children. ippr recommends taxing Child Benefit based on the earnings of the highest earner in a family, using the same tax bands as the current income tax system.
4. Modelling by the Institute for Fiscal Studies shows that tapering the Family Element of the Child Tax Credit by a rate of 39 per cent as soon as a family's income reaches the point where they are no longer entitled to the Child Element of CTC would save about £900 million. ippr's proposed changes to Child Benefit could cost about £700 million, so combining these two packages would be roughly cost-neutral overall.
5. The Child Poverty Act 2010 enshrines in law the goal of ending child poverty by 2020. The previous government had an interim target of halving child poverty by 2010 but most experts now believe this goal will have been missed.

The table below shows the net value of Child Benefit for different families if it were paid at a rate of £22 for all children and taxed.