Family-Friendly Taxation

• A new report from the Centre for Policy Studies and Conservative Growth Group warns that the British tax system is increasingly unfair towards families
• Couples with the same overall income can end up paying dramatically different amounts of tax depending on how earnings are divided between them. A couple earning £60,000 with two children will pay over £7,000 more as a single-earner than if both adults earned £30,000 each
• The British tax system is also much less kind to families than other comparable countries. At the average wage, a single-earner married couple with two children will pay more tax here than in France, Germany, or the US – and more than the OECD average
• The report, co-authored by the Rt Hon Ranil Jayawardena MP, recommends that when it can afford to cut taxes, the Government should prioritise turning the marriage allowance into a fully transferable personal allowance for parents
• A transferable allowance for all married couples would cost £6.1 billion but reduce poverty by 4.3%, with poorer families getting the greatest benefit. One in ten households would see their net income rise by more than 5%. However – in the short run – we would recommend a more affordable version, covering only parents with children under 18, which would cost £3.6 billion
• The report also advocates fulfilling the Conservative Party’s promise to increase the inheritance tax threshold to £1 million, again in order to make the tax system more family-friendly and address a significant source of injustice and inefficiency in the face of rising inflation
• The report argues that in the longer term, the Conservatives need to completely rethink family taxation and childcare subsidies, drawing on lessons from France, Germany and elsewhere

The British tax system is unfairly discriminating against many families, especially those in which one person stays at home or only works part-time because of care responsibilities, whether looking after a child or caring for an elderly or disabled relative.

‘Family-Friendly Taxation’, by CPS Research Director Tom Clougherty and Conservative Growth Group Chairman the Rt Hon Ranil Jayawardena MP, makes a series of recommendations for how to put fairness for families at the heart of the British tax system, including by reforming the marriage allowance and raising the threshold for inheritance tax. The report is the first in a series of collaborations between the Centre for Policy Studies and members of the Conservative Growth Group.

Changes proposed include the introduction of a fully transferable personal allowance for married couples with children, reform of the child benefit tax change, and a longer-term recommendation for a fuller rethink of the tax and childcare system.

Taken together, the changes would end the bias in the tax system against single-earner couples, at least for those families earning less than £60,000, by allowing the earner to use all of their husband or wife’s personal income tax allowance, rather than just 10% as at present (and only for those on the basic rate of tax). 

The report acknowledges the fiscal constraints on the Government, but argues that helping families is good politics and good tax policy, and should be prioritised when tax cuts are being considered. Modelling by PolicyEngine shows that the cost of the core recommendation on personal allowances ranges from £2.1bn if limited to married couples with a child below school age to £3.6bn if it covers married couples with a child still in school or younger, with a top estimate of £6.1bn if all married couples are included.

Among other recommendations, the report also urges the Government to make good on George Osborne’s 2007 promise to raise the inheritance tax threshold to £1m, offset by rationalising existing exemptions. The ambition, though, should be to abolish IHT altogether, which the report suggests could be a powerful pro-growth move if done the right way.

The PolicyEngine modelling used it the report is available here.

Tom Clougherty - Monday, 10th July, 2023