Martin's open letter to the Chancellor to fix unfair systems... on Child Benefit, Carer's Allowance, LISA fines, Tax-Free Childcare and more

From: Martin Lewis
Founder and Chair, MoneySavingExpert and 
the Money and Mental Health Policy Institute

To: The Rt Hon Rachel Reeves MP, Chancellor of the Exchequer
His Majesty’s Treasury
1 Horse Guards Road
Westminster
London
SW1A 2HQ

Wednesday 24 July 2024

Dear Chancellor,

Congratulations on your appointment – I hope it’ll be a fruitful and successful one for you and the country. I look forward, I hope, to meeting with you and your team again at some point to discuss issues that can improve things for UK consumers. 

Of course, I’m very aware you have been clear that the public finances are challenging, and sanctioning increased spending is difficult. So I wanted to draw your attention to a few – what I believe are sensible – non-partisan issues of financial injustice, most of which I was discussing with the previous administration (as well as your then-shadow team), and which could improve people’s situations without huge expenditure.

The issues include the High Income Child Benefit Charge, the Carer’s Allowance cliff-edge, renaming Tax-Free Childcare, fixing the broken Lifetime ISA system and more.

1. The High Income Child Benefit Charge unfairly penalises single-income families.

I wrote to and met with your predecessor to review the individual income assessment for Child Benefit, which means single-parent, single-earner and dominant-income families lose Child Benefit, even though their dual-income neighbour could earn nearly double and still get it. In the last Budget, he announced he would increase the threshold while a review to shift to a household income assessment was underway. I’d like to urge you to continue with this work.

The best way of highlighting the injustice came from Alan, who wrote to me prior to the threshold increase: "My son’s partner tragically died 34 days after giving birth to twins. My son has taken a new job that now pays him £60,000 and is struggling with the cost of living and mortgage repayments after the loss of a second income. HMRC has asked him to repay the Child Benefit. This seems grossly unfair that a couple can bring in nearly £100,000 but a single breadwinner loses out once they earn more than half of this. Are there any plans to change this?"

While the threshold has increased, that was mooted as an interim rise while a structure was found to move to household income. We don’t yet know if that research into shifting the assessment basis will continue (it will likely need to be done outside the tax system) – I hope it will. This is an issue I received an unprecedented volume of correspondence from the public about, it impacts huge numbers of people, and many care deeply about it.

2. The unfair Carer’s Allowance cliff-edge that too many fall off. 

Unpaid carers are unsung national heroes who save the economy and the NHS billions and provide a national wellbeing boost. Carer’s Allowance is a not particularly generous benefit that those on very low incomes, who care for people in need for over 35 hours a week, can get. Yet its structure is broken, old fashioned, unjust and in need of urgent change.

Earn £151 a week or less, and those eligible can claim the £81.90 per week allowance. Yet, earn a penny more – £151.01 – and they get nothing. This is perverse – most benefits, including Universal Credit, have a taper, so if you go over the threshold, the payment received is gradually reduced. Carer’s Allowance only has a cliff-edge, leaving many to plummet off.

Worse, the system seemingly sets people up to slip over the threshold unwittingly. Many on Carer’s Allowance need to restrict any working hours to avoid hitting it (a strange disincentive to work), yet if their wage increases slightly, eg, when the annual minimum wage increases, they can fractionally bust the threshold. 

If that happens, the terrible disconnectedness and poor benefits systems mean they’re often still paid the allowance for months, or even years. Then, even though they may have only earned a pound or two more, they’re later asked for unaffordable £100s or £1,000s back. 

I’d ask you to look at ending the cliff-edge going forward, and retrospectively for those carers who are facing requests for crippling back-payments – adding to the burden many are already faced with. The system is fundamentally unjust, and hits many of society’s most venerable and vulnerable.

3. Cancel the Lifetime ISA (LISA) withdrawal penalty for all first-time buyers.

I’m delighted to see you are focused on helping the housing crisis, and many in generation rent who are unable to buy. While new measures are welcome, I would also ask you to look at a legacy problem that has a simple low-cost fix.

The 25% bonus the state adds to young first-time buyers’ savings has helped many build up a deposit. Yet LISAs haven’t kept up with the times, and many, especially in south-east England, are now finding themselves fined when they use their own savings towards their first property.

• The £450,000 house price limit has been frozen since LISAs launched in 2017.

• Average house prices in England have risen over 27% in that time.

• In 26 of 32 London boroughs, first-time buyers’ properties now average £450,000+.

• To withdraw for any purpose other than buying a qualifying home (or from aged 60), you pay a 25% penalty (which includes roughly 6.25% of the saver’s OWN funds).

This means many who have saved in a LISA to build a deposit, as the state encouraged them to do, now face paying the Government a fine simply to access their money to buy a first-time property – as they’re now priced out and it’s above the threshold. 

On £20,000 saved, the 25% bonus added is £5,000, but the withdrawal penalty is £6,250, so they end up with £1,250 LESS than what they put in. This penalty was imposed to stop LISAs being used for unintended reasons – people are now being fined for using those LISAs on exactly what they were intended for.

The simple solution is to change the rules so that first-time buyers who are buying a property over £450,000 can withdraw money from their LISA to use as a deposit without getting the bonus but without being fined either, (technically this is done by reducing the withdrawal penalty from 25% to 20%,) so they’d get back what they put in plus any interest. Of course, index-linking the £450,000 house price limit would help too.

4. A simple change – rename the Tax-Free Childcare scheme to help the 800,000 families missing out. 

This scheme was named to make a political point. Yet its name is meaningless and confusing. It’s nothing to do with tax, and it’s not tax-free, rather it’s a welcome 25% top-up to what working parents put away for childcare costs. The misnaming of the system has caused damage – meaning fewer people understand it and therefore fewer claim it. With only 800,000 of the 1.3 million estimated to be eligible claiming, a change is needed.

Our new MoneySavingExpert research shows that a simple name change to ‘Help to Pay for Childcare’ made people who could be helped to claim four times more likely to understand the scheme. And further work, from feedback, and looking at past HMRC research means we think the name ‘The Working Parents’ Childcare Top-up’ would be even better.

This would be a simple way to hopefully improve take-up of this important help for parents to cover childcare costs, while keeping them in secure employment. 

It’s also worth noting, as with Child Benefit, the current threshold based on the ‘highest-earning parent’ rule was due to be reviewed and we hope that will continue.

Student living loans, financial education, mortgage prisoners, buy now, pay later…

Not wanting to push my luck too far – there are a number of other issues I would love to discuss with you or your department, at some point, but I'll keep them brief…

• English student living loans. These have been substantially cut in real terms and are often not enough for some to live on. Social mobility depends on the principle that UK students do not need to pay for university at the point of entry, only afterwards (in proportion to what they earn). Real terms maintenance loan cuts are especially detrimental to those from low-income/non-traditional university backgrounds who rely on the full loan as there are no parental funds to support them.

  
  

  
  

• Financial education. I was one of the leaders of the campaign to get financial education on the curriculum, yet it was a pyrrhic victory, as there is almost no state resource or meaningful support in place to deliver it – so much so, I was forced to personally fund a financial education textbook for all schools. I was pleased to see the Government will be assessing the curriculum and possibly making it compulsory for all schools. It would be great for the Treasury to champion the importance of practical financial education in primary and senior schools during that.

  
  

  
  

• Mortgage prisoners. I know you’re aware of the plight facing mortgage prisoners – the 200,000 trapped in high-interest mortgages, after the state sold their loans on to uncompetitive, sometimes unregulated lenders. The prior administration promised, but didn’t deliver, a response to the reports I commissioned from the LSE, which included costed solutions. Please can your team pick up this work? Many in your party have championed it. The financial, mental and physical toll on those trapped has led to repossessions, hardship and, terribly, suicide. 

  
  

  
  

• Stop lenders bombarding people with letters, calls, texts and emails about missed payments. 50% of people who are behind on bills have felt suicidal due to rising costs, but unlike in other countries such as the USA, there are no firm legal rules here limiting how often creditors can contact people about missed payments. Research by my charity the Money and Mental Health Policy Institute shows the repeated, consistent contact, often by multiple lenders, leaves people feeling dangerously harassed and distressed – and is unlikely to result in better debt repayment – signposting to help would be more productive. A proper limit and rules would align neatly with your focus on boosting consumer protections in financial services.

  
  

  
  

• Buy now, pay later. I was pleased to see that your Government plans to regulate buy now, pay later products – I would ask you to bring that in as soon as possible, as it’s well overdue. Crucially, we need to ensure that consumers can complain to the Financial Ombudsman if things go wrong. 

I would welcome the opportunity to provide a fuller briefing on any of these issues if it would be helpful. 

Kind regards, 

Martin Lewis

Founder and Chair, MoneySavingExpert.com 
Founder and Chair, the Money and Mental Health Policy Institute