In a critical analysis of the UK Government's planned reforms, the Institute for Fiscal Studies (IFS) also points out thousands more households will lose the benefit over the next few years because the threshold for receiving it will remain fixed and not take into account wage inflation. The IFS argues while it made sense to target universal benefits paid to the better-off as part of efforts to tackle the budget deficit, the way it was being done was "problematic" and the child benefit cuts would cause "incoherence" in the welfare system.
The think-tank also warned some families would end up losing as much as 65p of every extra pound earned, making it more likely they would work less or put more into pension funds to avoid the hit. From Monday, child benefit becomes means-tested. Households where one parent earns more than £60,000 a year will have to return the entire amount through the self-assessment system unless they have opted out of receiving it.
Also, it will be taken away on a sliding scale where mothers or fathers earn between £50,000 and £60,000 – causing a significant rise in marginal tax rates.
The system for recovering the cash has proved controversial, especially as families where both parents earn just under £50,000 each will keep their payments while a household where just one earner brings in more than £60,000 will lose the benefit.
The IFS said it expected the average loss to be £1300 a year with 820,000 families losing all the state help and 320,000 having it cut. It said the marginal tax rate faced by those with an earner between £50,000 and £60,000 would rise by 11 percentage points for those with one child and another seven for each additional child.
For 40,000 households with three or more children, it would jump as high as 65%. The IFS also pointed to a "series of administrative complexities", including the need for up to 500,000 more people to fill in self-assessment forms. Almost one-third of families affected by the new means-tested rules have not been formally contacted by HM Revenue & Customs because of a lack of up to date information.
However, the IFS said "perhaps the biggest concern is the incoherence it creates" and the impact on introduction of the Universal Credit. This will integrate six of the seven existing means-tested benefits and tax credits into one but, the Government will also be introducing a new and separate means test for child benefit.
Chris Leslie, Shadow Treasury Minister, said: "As well as being an administrative nightmare these changes are also unfair. How can it be right that single earner families on £50,000 will have their child benefit cut while people earning over £150,000 get a tax cut in April?"
A Treasury spokeswoman said: "The top 15% of higher earners will lose some or all of their child benefit but we are having to take some difficult decisions to reduce welfare spending and it is important those with the broadest shoulders bear the biggest burden."