Tax breaks hint to ease pain of benefit cuts

Prime Minister David Cameron and Chancellor George Osborne both sought to ease concerns about the plan, which could strip thousands of pounds a year from a household with just one income of 43,000, while two working parents each earning just under the higher rate threshold could earn more than 84,000 and still get the benefit.

Today Mr Cameron will use his conference speech to defend the measure as "fair", but last night he was forced to admit he was sorry the measure had not been included in the Tory party manifesto, as both he and his Chancellor referred to tax breaks for married couples as a way of offsetting the damage.

Tory MPs and users of the influential Mumsnet website made clear their concerns about a measure which threatens to penalise families where one parent stays at home to look after their children while their spouse goes out to work.

It has also emerged that far more than 1.2 million households – the number of higher rate taxpayers who currently receive the benefit – stand to lose out from the measure, because the Government has already decided to lower the level at which people start paying the higher rate from next April and then freeze it for three years rather than raising it in line with inflation.

Mr Cameron was forced to defend the move in a series of interviews while Mr Osborne, who announced the plan in his conference speech on Monday, sent a letter to Tory MPs explaining the decision and seeking to ease their concerns about a policy which threatens to shatter the notion of universal benefits and anger traditional middle class Tory voters.

Mr Osborne wrote: "I know some have pointed out that this approach will leave households that do not contain a higher rate taxpayer, but whose joint income is above the higher rate threshold, still in receipt of child benefit.

"The only way to assess these joint income families would be to create a new complex, costly and intrusive means test that would spread right up the income distribution.

"Effectively that would mean abolishing child benefit, which is one of the simplest and cheapest benefits to administer, and bringing every family in the country into a new tax credits system, with families having to provide details of their household income every year. Colleagues will be all too familiar with the drawbacks of Gordon Brown's tax credits system and I do not believe that would be the right approach."

He highlighted the pledge in the coalition Government agreement to introduce transferable allowances for married couples, initially directed at basic rate taxpayers but which the Tories are now leaving open to extending to higher rate tax payers to offset some of the impact of the child benefit cut.

Experts claimed the child benefit cut had been poorly thought through. They also warned that employees may be better off negotiating pay cuts to avoid losing the benefit, worth 1,055 a year for parents with a single child and 2,448 for those with three children.

An expert in employment law and partner at Sheffield law firm Kennedys, Diarmuid Deeney, said: "People could get a pay rise of 500 which loses them child benefit.

"I think we'll see people approaching employers and saying rather than giving me a pay rise can you give me an extra few days' holiday. I think people will be more innovative."

Experts at Grant Thornton also warned that the proposal presents a "dilemma" for those just above the higher rate threshold.

Anne Morrison, head of Private Client Services at Grant Thornton's Leeds office, said: "For employees who currently receive child benefit, moving into that bracket without a significant pay increase is not a decision that will be taken lightly."

Today Mr Cameron will use his first conference speech as Prime Minister to "recognise marriage in the tax system".

In a round of interviews yesterday he said he wished he was not having to remove child benefit from higher rate taxpayers at all. The move is expected to raise about 1bn.

Leader determined to lift the gloom

David Cameron will use his leaders' speech today to stress the coalition's belief in fairness – but warn that does not simply mean throwing benefit cheques at those on low incomes.

He will threaten the banks with penalties if they fail to lend to businesses and he stresses the importance of small firms to the recovery.

Painting a positive vision of the future once the economy recovers – in response to Ed Miliband's claim the Tories are the party of gloom – he will tear into Labour's record and say ensuring everyone in society is given the chance to succeed is more important than giving out cheques.

Wife Samantha will watch the speech, although daughter Florence will not be in the arena in Birmingham.