Furore over tax on child benefit

THE CHANCELLOR is facing a battle with Treasury colleagues and backbench MPs over his plans to raise child benefit but tax it for better- off couples.

Dawn Primarolo, the Paymaster General, has told colleagues she is opposed to child benefit being taxed and Labour MPs are lining up to attack Gordon Brown if he goes ahead with taxing it in his Budget on 9 March. Mr Brown raised child benefit by pounds 2.50 above inflation in his last Budget. The increase will take effect from next April at a cost of pounds 875m but he gave a clear signal that he would be drawing up plans to tax it.

The Chancellor is believed to be intent on taxing the benefit with an increase to soften the blow, but he is under intense pressure to abandon the plan.

Former Social Security minister Frank Field has warned it would be difficult to gain any savings by taxing the benefit because of the move to separate taxation for men and women.

Ministers and Labour MPs, who privately were discussing the Budget this week, are opposed to taxing child benefit because it would undermine its value as a universal benefit. The Tories are also prepared to fight for child benefit, and are ready to accuse Mr Brown of attacking the middle classes.

In a speech yesterday, the Chancellor gave the strongest hint so far that he intends to boost the value of child benefit to make the family one of the main themes of the Budget. "It is because we are determined to continue our tough approach on public finances that the Budget will ensure we stay on track to meet our prudent fiscal rules and lay the foundations for a strong economy which supports enterprise, work and families," Mr Brown said

The 20 per cent increase in the pounds 11.05-a-week rate of child benefit for the first child will come as a boost to families within weeks of the Budget. It is likely to be taxed for top rate taxpayers, but there will be complications in taxing wealthy unmarried couples where the woman is not working, or is in low-paid employment.

The Chancellor is understood to be planning a radical package of reforms, including the abolition of mortgage interest tax relief (Miras). Labour MPs said this week's half per cent cut in interest rates made it more likely that Miras could be scrapped without protests from home owners.

The star item in the Chancellor's Budget box is expected to be a cut in taxes for the lowest paid, with the introduction of the promised 10p rate of income tax, which could take many low-paid people out of tax altogether.

The move could cost pounds 7bn but abolishing Miras would save over pounds 2bn and the Chancellor is believed to have sufficient sums to cover the additional cost of the tax cuts.