According to the Institute for Fiscal Studies (IFS), families with children have been disproportionately impacted by benefit cuts since 2010. Reductions to tax credits and the introduction of the ‘two-child limit’ in Universal Credit have significantly reduced incomes for many families, particularly larger ones.
Additionally, high-earning families (income over £60,000) have experienced cuts to child benefit entitlements, while the benefit cap has primarily affected those with children.
These changes have resulted in substantial income losses for families with children, whether they are in or out of work. Out-of-work families have seen the largest reductions, with some losing an average of £5,500 per year.
However, working families have also experienced significant losses. For instance, a single-earner couple with two children and an income of £80,000 would have received £3,200 in benefits annually in 2010-11, but today they receive nothing. Similarly, a single parent with two children earning the average wage has lost £5,200 per year, potentially more if renting.
Under the current system, because the thresholds are individual, if two parents earn £59,000 each – a household with an income of £118,000 – they would receive full child benefit, but a household where one parent earns £80,000 and another is unemployed would receive nothing, according to a Guardian report.
“Unfairness has been baked into the current system which allows two-parent households with combined earnings of up to a penny under £120,000 to keep their full entitlement, whilst others lose the benefit entirely because one parent tops £80,000,” says Danni Hewson, head of financial analysis at AJ Bell referring to the Conservative Party’s proposed plans to raise the high-income child benefit tax charge threshold to £120,000 for households.
The Conservatives said the combined net cost of the changes would be £1.3bn a year by 2029-30, and they would benefit 700,000 families by an average of £1,500.
HMRC should prepare for a headache
However, she says testing this cap against households rather than individuals is likely to prove a “massive headache for HMRC” and raises the question of how long it would take to implement such a change.
This is her argument: Many voters will question the timing of this decision, asking why income tax thresholds weren’t adjusted during the past 14 years, a period where frozen thresholds and inflation significantly eroded families’ incomes. The government may highlight its recent efforts, such as expanding free childcare, which has benefited families, particularly mothers facing challenges returning to work.
Research conducted for AJ Bell’s Money Matters campaign highlights the impact of childcare costs on parents’ employment decisions. Prior to recent policy changes, only 55% of women returned to full-time work after their first child, and this number dropped to 26% after their third child. The high cost of childcare has disproportionately affected families where one parent chooses or needs to stay at home, placing a significant economic burden on the working parent.
Where will the money come from?
“Then there’s the issue of where the money will come from, with the Tories claiming the plans would cost £1.3 billion. Cracking down on tax avoidance and evasion appears to be the favoured method of cobbling together the funds for these proposals, a strategy that feels more akin to rifling down the back of a sofa already stripped of all its cushions than a sure-fire revenue raiser after the election.
“Elections are a time when promises are plentiful and this is certain to grab headlines, but promises don’t pay the bills and voters know it,” says Hewson.
