Around 50,000 families are set to be caught up in a tax trap next year due to a “collision” of Universal Credit and Child Benefit rules, according to new analysis.
The Resolution Foundation explained how the two separate systems for Child Benefit and Universal Credit were originally designed to affect two distinct parts of the population.
With the Child Benefit rules, if someone in the household earns more than £50,000, the High-Income Child Benefit Charge kicks in.
The charge is equal to 1% of a family's Child Benefit for every £100 of income that is over £50,000 each year. If one member of a household earns more than £60,000 a year then they do not receive any Child Benefit at all.
You are also entitled to Universal Credit on earnings above £50,000 if you have high housing costs, or get help with childcare costs.
However, due to the “decade-long freeze” of the £50,000 threshold at which Child Benefit starts to be withdrawn, families will start to see their Child Benefit withdrawn at the same time as their Universal Credit is tapered away next year.
The Resolution Foundation has warned growing numbers of families with children will face effective tax rates of at least 80% and up to 96% as a result.
The Resolution Foundation said that since the threshold for High-Income Child Benefit Charge was introduced and frozen in 2013, around 600,000 families have faced the high tax charges.
The think tank warned that a collision between the two systems has led to the “highest marginal deduction rates in the UK” with families with one child paying a tax rate of 80%.
Families with two children paying 83%, and with three children some could face a rate of 87%.
Taking into account student loan repayments and pension contributions, the rates could rise as high as 96% for three-child families.
The Resolution Foundation said: “A hypothetical earner who falls into this category, with an income of £50,000 and two children, would take home only £800 more if they received a £10,000 pay rise.”
The think tank also warned that the number of families affected by the higher tax charges, those earning between £50,270 and £60,000, could nearly double to 90,000 by 2030.
Karl Handscomb, senior economist at the Resolution Foundation, said: “It is not the super-rich that have the highest effective tax rates in the UK, but some families with children.
“50,000 families will face tax rates of between 80 and 96% where they are also seeing their Universal Credit payments reduced with each extra pound they earn. The number of families affected by this double whammy is set to almost double by the end of the decade.
“This ‘children’s benefits mess’ needs cleaning up as it creates huge complexity and disincentives for these workers to seek higher pay. But the Government faces significant challenges in fixing this problem, as the solutions are either expensive or deal a major blow to families’ finances.”