Comparisons - "current versus reformed" & various cases
Reasoning for the presentation style used here
Comparisons based on the number of qualifying children
Comparisons based on housing costs
Marginal increases in liability as net income increases
Marginal increases in total deductions as gross income increases
A related topic - NRP incomes and the new formula
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Marginal increases in total deductions as GROSS income increases

"Child support payments should be regarded as a statutory tax on fatherhood" (Baroness Hollis of Heigham, reported in The Times on 4th January 2000, analysed below).

At face value, that is a very objectionable statement for a number of reasons. She may simply have meant that, for non-resident parents, paying child support should be as inevitable a paying taxes. She may have intended to make a specific point to some particular audience. Or she may simply have been mis-reported.

That comment prompted this article to compare child support assessments with income tax & NI assessments to see if any conclusions can be drawn.

Comparisons between paying income tax + NI and paying child support

The majority of people pay income tax and National Insurance, and appear to manage. Why do child support payments appear to cause more problems? Are the issues to do with the amounts, the timing, the combination of deductions, or other reasons?

First, this article compares the amounts deducted from the gross income for these different purposes. Later, the results are discussed.

Notes: unlike other comparisons, gross income not net income is used here. The income tax & National Insurance rates are those for 1999-2000.

1 - Comparison between income tax + NI and the current scheme

Circumstances: housing cost 50 per week, all children young, no other complications. Employed, not self-employed.

The horizontal axis is gross income. The vertical axis is the percentage of gross income deducted for, respectively, income tax + NI, then 1 child, 2 children, 3 children under the current scheme.

(The kink in the tax + NI curve occurs at the 1999-2000 "upper earnings limit" for NI).

The first result is that, even though these circumstances result in relatively high levels of child support, the child support payments are significantly less than the amount of income tax + NI paid. Note that these are high assessment circumstances because of the low housing costs.

So why is child support seen to be a bigger issue than income tax & NI?

 

2 - Comparison between income tax + NI and the reformed scheme

Circumstances: no other complications (housing costs and ages of children are ignored). Employed, not self-employed.

The horizontal axis is gross income. The vertical axis is the percentage of gross income deducted for, respectively, income tax + NI, then 1 child, 2 children, 3 children under the reformed scheme.

(The kink in the tax + NI curve occurs at the 1999-2000 "upper earnings limit" for NI).

The first result is that for 3 children the child support approaches the amount of tax & NI paid at more typical non-resident parent incomes. For fewer children, and at higher incomes, the amount of child support is significantly less than the amount of tax + NI.

 

3 - Combining both types of deductions - current and reformed scheme

Circumstances: housing cost 50 per week, all children young, no other complications. Employed, not self-employed.

The horizontal axis is gross income. The vertical axis is the total percentage of gross income deducted for, respectively, 1 child, 2 children, 3 children under both the current and reformed schemes. That is, in each case the child support has been added to the tax & NI to find the total deduction from gross income.

Ouch! (It would be even worse if there were arrears deducted as well). In the current scheme, once the non-resident parent gets near to the average male earnings, the total deduction from earnings can approach 50% of what the employer is paying.

The steepest parts of the curves, representing the amount of extra money deducted for each extra gross pound earned, are approximately:

  • Current scheme (any number of children) from £250 to £300 pw - 89p in the £
  • Reformed scheme (1 child) from £150 to £250 pw - 49p in the £
  • Reformed scheme (2 children) from £200 to £250 pw - 57p in the £
  • Reformed scheme (3 children) from £200 to £250 pw - 65p in the £

Examining the effects at smaller income intervals than £50 may show even higher marginal rates.

Discussion

Marginal rates of total deductions

Another article has discussed the marginal rates at which child support increases as net income increases, showing that the reformed scheme is better behaved than the current scheme.

What this article shows is that once income tax & NI are included, the current scheme can be very severe indeed. Here are the approximate amounts in real money (rather than percentages) over the steep part of the curve for the current scheme (for an NRP with these circumstances):

Gross income Net income Child support Retained income
£200 pw about £163 about £5 about £158
£250 pw about £197 about £29 about £168
£300 pw about £230 about £57 about £173
£350 pw about £264 about £79 about £185

For an NRP initially on £200 gross, earning an extra £150 would leave an extra £27 after all these deductions. Indeed, increasing earnings by £50 from £250 to £300 would leave just over an extra £5! These earnings cover the range from well under to well over average NRP earnings ( which is £207 net). They represent earning at which in other circumstances NRPs would probably be trying to "better themselves". These deductions simply make it financially hardly worth it! It must be particularly galling if the PWC is on Income Support so the children don't benefit from any of the extra money paid.

They certainly make it worth while doing everything possible to hide any increased earnings! No wonder some NRPs discuss hiding overtime. Another important issue is that if the CSA makes a mistake, or uses income figures which are no longer representative, the consequences can be very large.

Even the reformed scheme doesn't behave as well once income tax & NI are included. All the talk is about NRPs paying 15% / 20% / 25% of their net income. In fact, only about a quarter of them are likely to do so, and many of the rest will be in the region where from half to two-thirds of anything extra they earn will be deducted in total. Here is a similar table for the reformed scheme for an NRP with 3 qualifying children:

Gross income Net income Child support Retained income
£150 pw about £130 about £19 about £111
£200 pw about £163 about £33 about £130
£250 pw about £197 about £49 about £148

Earning an extra £100 gross leaves the NRP with an extra £37 of spending money. (The reformed scheme is better than the current scheme. This leaves him with a higher proportion of gross earning - about one-third here, instead of about one-sixth in the earlier table. It is also only as bad as this if there are 3 children).

There has been no public discussion about the marginal rates of child support as income increases, nor about the effects of taking into account income tax & NI. The situation will improve a little with the reformed scheme, but there will continue to be exclamations of "stuff it, why bother to try to earn more?"

Does the government understand the impact of such accumulated deductions?

The suspicion is that the impact of these marginal rates of withdrawal, and the way child support interacts with tax & NI, is not appreciated, or at least acknowledged, by government. For example, the CSA Reform White Paper says:

"Where overtime is regular and pay including overtime is representative of the amount of money normally available, the new rates mean that only 15 to 25 per cent of overtime pay will count for maintenance. At least 75 per cent will be retained by the nonresident parent. This gives nonresident parents a clear advantage from working the longer hours that overtime pay covers while at the same time giving a share of the increased prosperity to the children." (White Paper Annex Two - New rules for income, Paragraph 5 - Overtime payments)

In some cases, each extra gross £ earned, for example as overtime, will result in extra deductions of 65p (tax, NI, plus child support for 3 children when the NRP pays at the reduced rate). It is false to claim "At least 75 per cent will be retained by the nonresident parent". It may be only 35% of extra gross income retained.

Child support issues versus income tax + NI issues

People accept tax. This may be because it has been around a long time, or because it is seen to be inevitable, or perhaps because people see the benefits.

Why not accept child support to the same degree? Perhaps this will eventually happen to some extent. If/when the CSA has been around for decades instead of the current 8 years, people will simply expect it to be around, and they will not normally be surprised by it. People separating, knowing that they have children, will learn to adapt to their responsibilities from then on.

A significant difference will always be that a child to be supported can be a surprise. You know you are going to pay taxes, but you may not know that someone you had a one-night-stand with has had your child and is now after child support. You suddenly have to adapt to a significant loss of your income for perhaps 18 years. Eventually, this will cause men not to become unexpected fathers - they will avoid sex where they cannot be sure of the outcome, or they will use the range of contraceptives that will become available to them. That's good - there shouldn't be children around who were not wanted, or at least accepted, at time of sex.

Another significant difference is that child support is in addition to taxes, not instead of them. So you have adapted to taxes - now here is an additional thing to have to adapt to.

The Times article

(At the end there is a commentary about the parts in red).

The Times January 4 2000

Child payments 'must be seen as tax on fathering'

BY ALEXANDRA FREAN, SOCIAL AFFAIRS CORRESPONDENT

CHILD support payments should be regarded as a statutory tax on fatherhood, and not a voluntary contribution, the government minister in charge of reforming the Child Support Agency has said.

Baroness Hollis of Heigham, Social Security Minister in the Lords, said she was determined that payments by absent parents should become as widely accepted as income tax. Only 34 per cent of nonresident parents (mostly fathers) who have received a full assessment pay in full, with 35 per cent making part-payments. The rest pay nothing.

Baroness Hollis said that absent fathers had to get into the habit of making child support payments as soon as they become liable. "We are trying to turn [child support] into a tax, rather than a voluntary contribution," she said. The CSA White Paper will be debated on January 11. It proposes replacing the complex maintenance formula with a simple fixed rate levy of 15 per cent of net income for one child, 20 per cent for two and 25 per cent for three or more.

MPs will be provided with ready reckoners which they will be able to use to tell people at a glance how much child support they will have to pay or how much they are due. The information will also be available in leaflets in post offices and libraries.

Baroness Hollis also announced that parents will be given the chance to discuss their case in face-to-face interviews. The hope is that by giving the CSA a "human face" and offering nonresident parents the chance to put their side of the story of their marriage break-up in person, they will reduce antagonism and complaints about inaccurate or unrealistic assessments.

Commentary on red text

"fathering": she is using this as a short form of "being a non-resident parent", which is totally different!

"absent parents": now "non-resident parents", which still isn't always accurate.

"34 per cent": 49 per cent in the quarter up to November 2000.

"a tax": child support is hardly "a compulsory contribution to state revenue" (New Oxford Dictionary of English)!

"put their side of the story of their marriage breakup": to what end? The CSA simply administers a legal formula which doesn't take such stories into account. Indeed, the "variations" regulations specifically prohibit the CSA from taking such things (who caused the breakdown, whether the children were planned, etc) into account.

"complaints about inaccurate or unrealistic assessments": one way of reducing complaints about inaccurate assessments will be to reduce the number of inaccurate assessments! In 1999-2000 the CSA was set a target to achieve correct assessments values in at least 78% of cases. (What would you think if that was your bank's accuracy target?). They achieved 70.5% correct!

"leaflets in post offices and libraries": good, but it may not be easy - apart from net income, there are 60 combinations of numbers of children and shared care arrangements to be taken into account:

Qualifying children   Relevant children   NRP nights of care pw
    0   0
1   1   1
2 times 2 times 2
3 or more   3 or more   3
        Equal sharing

"There is always death and taxes; however death doesn't get worse every year."

Page last updated: 5 July, 2004 © Copyright Barry Pearson 2003