Brown retreats on taxing child benefit

THE CHANCELLOR is to shelve plans to tax the child benefit payments of higher-rate taxpayers in his Budget in 11 days' time.

Gordon Brown had been widely expected to introduce the measure this year after floating it in last year's Budget, but Treasury officials have warned him that there are severe difficulties. He would also face a backlash from women because, to raise a significant amount of money, he would have to tax the joint income of men and women, breaching the principle of independent taxation introduced in 1990.

Child benefit, currently pounds 11.45 a week for the first child and pounds 9.30 for each subsequent child, costs the Exchequer pounds 7bn a year and is paid in 95 per cent of cases to the mother. While it would be easy to tax the child benefit received by top-rate taxpayers, this would raise only pounds 70m a year because there are only 100,000 of them. The revenue would fund an increase in child benefit of just 10p a week.

The Treasury could raise pounds 450m by imposing the tax where either the mother or father is a top-rate taxpayer. About a million people would then pay 40 per cent tax on their payments, enough to finance a 70p-a-week rise in child benefit.

However, taxing the child benefit paid to mothers who have little or no income of their own but have a high-earning partner would be difficult and costly to administer.

The Inland Revenue would need to ask all higher-rate male taxpayers to declare whether their wife or partner received child benefit. Many people would find the requirement to provide details of their personal lives highly intrusive.

Mr Brown believes it is unfair to assess well-off couples independently for tax but low-income partners jointly for benefits such as income support. But Treasury officials have argued that the practical obstacles to treating child benefit as part of "joint income" are currently insurmountable. Another anomaly is that a couple where both earned pounds 30,000 - just below the top-rate threshold - would not be taxed on their child benefit, while a family with one pounds 35,000 earner would.

The Chancellor believes the case for taxing child benefit would be enhanced if he continues to increase it sharply. He has already announced that it will rise by pounds 2.50 a week for the first child in April and a further inflation-plus increase is expected in the 9 March Budget.

Mr Brown may seek to overcome the technical problems by combining taxation of child benefit with a wider shake-up of taxes on the family. The Budget is expected to announce the phasing out of the married couple's tax allowance, currently worth pounds 285 a year, which will fall to pounds 190 in April.

The Chancellor's long-term plan to tax child benefit faces another setback when the all-party Commons Social Security Committee rushes out a report before the Budget raising doubts about the proposal.

When the committee questioned Treasury and Inland Revenue officials on Wednesday, some members expressed concern that the proposal would deter cohabiting couples with children from declaring their relationships. And the Institute for Fiscal Studies warned: "The only means by which such a reform could be enforced is by the Inland Revenue involving itself in the monitoring of cohabitation, in much the same way as the Benefits Agency."