Chancellor Jeremy Hunt has been urged to scrap the “tax increase” which will see parents pay thousands of pounds to HMRC as wages rise.
Ahead of the Autumn Statement on Wednesday, Conservative Party MP Greg Smith called for a “review” of the High Income Child Benefit Tax Charge (HICBC) system, which sees families start to lose Child Benefit if one parent earns £50,000.
The Child Benefit will be lost entirely if they earn an individual income of £60,000.
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The tax threshold has not changed since it was introduced in 2013, meaning as wages rise amid inflation, more and more people are being dragged into the tax net – known as fiscal drag.
Have you been affected by the tax threshold freeze? If you want to share your story, get in touch by emailing money@gbnews.uk.
Chancellor Jeremy Hunt is being urged to look at the Child Benefit tax system
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A person earning a £50,000 salary in 2022 with two children stands to lose £2,075 in Child Benefit by 2027 due to the charge, according to calculations by interactive investor, based on assumed salary increases in line with inflation.
Due to the HICBC rules, both parents earning below the £50,000 threshold won’t be affected, meaning families with a total gross salary income of £99,000 wouldn’t be affected – but those earning £50,000 from just one worker would be.
During an exclusive interview with GB News, Tory MP for Buckingham Greg Smith said: “I do think there does have to be a review of the system to ensure that those that need Child Benefit are able to access it.
“If thresholds and inflation have had an impact on that, the Chancellor needs to be straightforward about it and fix those thresholds because that will equally start to play into the increasing offer for parents of very small children, preschool children, as the government's offer on funded childcare places comes in.
“We have to have a fair system that ensures that the support that we offer to families that need it is fair and equal.”
Addressing fiscal drag, he said: “Tax thresholds, if they're not shifted with inflation, if they're not shifted with wage inflation, are a tax increase.
“I don't want to see tax increases.
“I want to see people keep more of what they earn. And if tax thresholds aren't keeping up with wage inflation and overall inflation, that's a tax rise that people will find very unwelcome.
“It's a tax on aspiration. It's a tax on people being able to get on with their lives and do the things they want to do, buy the house they want to buy. The cars, the holidays and the weekly shop.”
GB News asked whether the MP thought it was fair the tax was applied on individual income of £50,000 – meaning some households with total gross salaries of around £99,000 aren’t affected by the rule, but others with substantially less annual income are affected.
Mr Smith said: “The way people, you know, structure their own lives is up to them. I won't criticize anyone who wants to have maybe the husband or the wife who works and the other stays at home to look after the children or maybe an elderly relative that they've got to care for. I won't criticize anyone for that.
“What we've got to do in the tax system though is ensure that no one when they go to work and they strive and they work hard and save hard and try and play by the rules, gets punished by a tax rate that is simply unjust and unfair - be that a threshold to pay high rate tax, be that a threshold to receive things like Child Benefit.
“That's what we've got to keep the eye on here, not how individuals and families are structuring their own affairs.”
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WATCH NOW: Greg Smith MP urges Sunak to raise the higher rate tax threshold
Mr Smith is urging the Chancellor and Prime Minister Rishi Sunak to increase the higher rate tax threshold – which they have frozen at £50,271 until 2028, to stop basic rate taxpayers from being dragged into the 40 per cent tax bracket.
People earning a £50,000 salary in 2022 are due to pay £1,967 extra tax by 2027 due to the freeze, compared to if the thresholds increased with inflation, according to interactive investor.
The fiscal drag is due to cost someone earning £50,000 last year with two children up to £4,000 by 2027, due to £2,075 being lost to the High Income Child Benefit tax Charge.
Alice Guy, head of pensions and savings at interactive investor said: “If you’re a parent then fiscal drag is potentially even more painful, as you could stand to lose Child Benefit as your wages gradually rise with inflation.”
"Any tax can be a stealth tax if thresholds don’t increase in line with inflation, which makes it more important than ever to be aware of the common stealth taxes and tax traps that you could be drawn into," Sam Robinson, principal financial adviser at Almond Financial said.
Mr Robinson has shared some tips on how people could reduce the risk of being hit by fiscal drag.
Income tax bands are different if a person lives in Scotland.
An HMT spokesperson said: “The Charge means that the government can support the majority of families while ensuring stable public finances.
“The Government has recently announced improvements, taking steps to allow employed individuals to pay HICBC through their tax code and parents to receive a National Insurance credit retrospectively.”