The Chancellor’s decision to reform Winter Fuel Payments through the tax system rather than through directly changing entitlement rules means that, in effect, a new tax charge for ‘high income’ pensioners will be introduced from next April. Though we are still waiting for full details, it seems that the new system will work along similar lines to the High Income Child Benefit Charge (HICBC) that has applied to households with children since 2013. As the HICBC is a subject that we’ve examined before (most recently in a blog from last March on Jeremey Hunt’s proposed reforms), it’s worth looking at what the new High Income Winter Fuel Payment Charge (HIWFPC), as we might inelegantly call it, can learn from that system.
Income threshold
Clearly one issue is where to set the threshold for the charge. The government have opted for a threshold annual income of £35,000 for the HIWFPC, which compares to a threshold level of £50,000 when the HICBC was first introduced and an annual income of £60,000 since April 2024. The government have not said whether the level of the HIWFPC threshold will be uprated every year, but it’s worth noting that even after freezing it for a dozen years the HICBC income threshold did eventually increase. So, the first lesson from the HICBC is that, whatever the policy intent, the threshold income level is likely to change over time, probably in the direction of getting more generous.
Couples
Another issue relates how income is divided in couples. It’s clear that the government intends to levy the tax charge on individual incomes, rather than attempt to aggregate income for couples, as any other design would fly in the face of individual taxation and be very difficult to administer. But this means unfairness is baked into the system, in that richer pensioner couples where the income lies mostly with one partner will still get some payment, while couples with less income but split more evenly will miss out. While the amounts involved are small, the system is nevertheless obviously unfair: as the payment is divided equally in couples (bar those getting Pension Credit), a couple where one person has an income under £35,000 will still receive a £100 Winter Fuel Payment (or £150 if over 80) even if their partner has a six-figure income. A couple where both have an income of £36,000 a year would get nothing. The second lesson from the HICBC is that this unfairness is impossible to avoid, and almost inevitably will lead to pressure to revise the income threshold upwards.
Take-up
The last and most important lesson from the HICBC relates to the problem of take-up; the issue that not everyone who is entitled to benefits claims them. In this case there is an important difference with Child Benefit, as the system for claiming Winter Fuel Payments is automatically ‘opt-in’, in that payments will go to everyone over pension age by default and then be taxed back from individuals with a taxable income over £35,000. In contrast, the default setting for Child Benefit is ‘opt-out’, as Child Benefit must be actively claimed and there are no automatic payments. When Child Benefit was universal this was not problematic, but since the HICBC was introduced the results of defaulting to opt-out have been close to disastrous.
The government’s belief appears to be that removing benefit entitlement through the tax system is an entirely different proposition to means-testing. However, experience with the HICBC suggests that in terms of their impact on benefit take-up rates it’s difficult to separate the two. The latest statistics on take-up of Child Benefit show that a quarter of parents with children under one are missing out on their entitlement. That’s well below the 84% level of take-up that Child Tax Credit achieved towards the end of its life, despite the fact it was a ‘targeted’ benefit.
Recent research from HMRC casts further light on why Child Benefit take-up has been so badly affected by the HICBC. Through detailed interviews with parents who have chosen not to claim Child Benefit it concludes:
“The charge is often associated with eligibility misconceptions,…..poor understanding of how the charge is applied has created fears among both those liable and not liable to it….. the complexity of the application process and the possibility of having to pay back some/all of the money – creates enough confusion that many participants do not take the process any further.”
The lesson for the HIWFPC is that communication of a clear, simple message will be vital in ensuring that take-up does not become the issue it now is for Child Benefit. The fact that the system is set up to automatically make payments and then tax them back is a huge advantage that government communications should build on. The message from Rachel Reeves that everything will work automatically and “no one will need to register with HMRC for this or take any further action” is key. To back this up extra steps should be taken to ensure that no one can lose out when the system goes wrong and the Winter Fuel Payment is received but not taxed, perhaps through removing HMRC penalties and interest charges at least for the first year of operation of the HIWFPC.
Even better though would be remove the ability to opt-out altogether. While an opt-out form to allow people to not claim the benefit sounds like a good idea, it will in fact mean more work for DWP and HMRC than letting the automatic systems work in the same way for everyone. As we have seen with Child Benefit, it also risks consumer confusion and reduced take-up. Removing the option to opt-out would make the HIWFPC a simpler process to implement and, moreover, would keep the spotlight firmly on HMRC’s ability to implement the charge through PAYE for the vast majority of pensioners. If the government can show that it can successfully give with the left hand and take with the right, automatically and accurately for a large group of people, then the HIWFPC could become the unlikely start of a wider move to tax-benefit integration.
Similar lessons apply to the HICBC, where a system based on PAYE is also being implemented. In particular, as well ‘automatically’ taxing back payments, the government should consider making claiming Child Benefit the ‘opt-in’ default when a new child is registered after birth.
