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Child Benefit - to claim or not to claim?

Child Benefit - to claim or not to claim?

Child Benefit - to claim or not to claim?

Wednesday 31 January, 2024

St Albans Accountant Chris Wallace encourages individuals with children who are not currently claiming child benefit to register for Child Benefit and submit their claims without delay. No matter what they earn! But why?

The £30,000* risk of not claiming Child Benefit

This article explains the sliding threshold for Child Benefit payments. However, it emphasises a crucial point – the potential adverse impact on your pension when Child Benefit is not claimed, irrespective of your income you could be *£30,000 out of pocket if you live to 90. If your salary exceeds £50,000, you might assume ineligibility for Child Benefit, but...

What is the child benefit threshold?

If your annual income exceeds £50,000 before tax, you are still eligible for Child Benefit. However, it is reduced as a percentage of earnings to zero via repayments dependant on your full salary before tax.

Child benefit is a government payment designed to help parents or carers with the costs of raising children. While it’s not strictly means-tested, under rules introduced a decade ago the amount of money you receive is reduced or removed if you, or your partner, earn more than £50,000 via the High Income Child Benefit Charge (HICBC).

If you choose to receive the payment and you, or your partner, earn more than this amount, a charge is applied at the rate of 1% per £100 of excess income, which you have to pay via a tax return. As the threshold has not changed since it was brought in, more and more people are being hit by this charge as wages rise.

Given this hassle, you might be tempted to opt out of the child benefit payment altogether but beware of unintended consequences. For example; this option may affect your state pension entitlement.

What is child benefit?

To be eligible for child benefit, you must be responsible for bringing up a child who is under 16, or under 20, and in approved education or training. Only one person in a household can claim the benefit, and it makes sense for this to be whichever parent takes time out of work when the child is born. There is no cap on how many children you can claim for, but they will get different child benefit rates.

It is currently worth £24 per week (£1,248 a year) for the eldest, or only child. You can then claim £15.90 for each additional child, equating to almost £827 a year.

However, if you or your partner earn more than £50,000 then you’ll have to repay some of this money.

This High Income Child Benefit charge equates to 1% of child benefit being charged for each £100 you or your partner earns over £50,000. So, if someone earns £55,000 you’ll be charged half of the benefit. Those who earn £60,000 or more will have to repay the full amount.

Chris Wallace, Director of Visionary Accountants in St Albans said:

“Unfortunately, it doesn’t matter what your household income is. A family with a single earner paid £60,000 can’t keep anything, whereas two parents each paid £50,000 can claim the full amount. This has always been considered a particularly unfair aspect of the legislation.”

The £50,000 earnings threshold has been locked in place, despite rising wages, but if it had increased in line with inflation, it would be at £65,000 today. As a result, the number of families getting payments has dropped to its lowest level since records began, with the continual freeze on the so-called ‘High Income’ threshold hitting more and more parents.

But it could still be worth claiming.

How Child Benefit can affect your State Pension

Unfortunately, choosing not to claim child benefit means that you throw away something valuable; the National Insurance “credit” which comes with receipt of child benefit for a child under the age of 12. For example; if someone is at home with a young child and not in paid work, there might be a gap in their National Insurance (NI) record. But the system of NI credits (previously known as “Home Responsibilities Protection”) means that their NI record is protected for the year. 

Indeed, under the new state pension system a year of NI credits for raising a child could be worth as much towards your state pension as a decent salary. With the majority of child benefit payments going to mothers, this system is a particularly important one to protect the state pensions of women.

It is possible to see the value of these credits by looking at how they affect your state pension.

At the moment, the full state pension is worth £203.85 per week, or around £10,600 per year. If someone hasn’t yet built up a full state pension (which will be true of most parents), adding one extra year to their National Insurance record adds 1/35 of the full pension rate, or just over £300 per year. 

This means that someone who doesn’t go back to work until their child is of primary school age, and therefore misses out on four years of National Insurance, could end up £1,200 per year short on their state pension if they don’t claim their NI credits.

If you were to claim the state pension until you reach 90 years of age – something that’s becoming increasingly common – it means you could potentially miss out on £30,000 of state pension payments.

Worried? You can check your National Insurance record here.

How to claim NI credits only

When the High Income Child Benefit Charge was introduced, the Government foresaw that some people might react by opting out of receiving the benefit, and provided a mechanism by which people could still get their NI credits.  

On the child benefit claim form there is a box to tick which says, in effect, “please don’t pay me the money, but do give me my NI credits”. This is under Box 62: 'Do you want to be paid Child Benefit?' You can tick the 'No' Box stating "I do not want to be paid Child Benefit, but I want to protect my State Pension." There is then a further declaration on page 8.

The problem is, if you’ve decided not to claim child benefit, then you probably won’t ever load up a child benefit claim form in order to tick a box and it’s far from obvious that there would be a form required to claim a benefit which includes a box saying “but please don’t pay me this benefit”!

Mitigate the repayment with interest income

For higher earners, there is a “stoozing” type hack you can use with child benefit payments – even if you’ll eventually have to pay them back as a tax charge. It's not terribly exciting in terms of return and only works for those who can afford to live without the Child Benefit as income.

This involves you collecting the child benefit and putting the money into a savings account, such as a regular saver, where you can earn some interest. Then, when it’s time to file for self-assessment, you’ll have the money there ready to pay back – plus interest. This works best if you have lots of children, as the potential gain is higher for each child you have.

Child benefit is £1,248 a year if you have one child, and £826.80 a year for any subsequent children.

Take the example of someone who earns £55,000, has two children, and begins receiving child benefit payments in April. This means they can base their calculations on a full tax year. When their tax return was due, they would be entitled to keep half the child benefit amount, and would have to repay the other half.

Let’s say they took their full payment and put it into a regular saver account paying 5%. Assuming they made no withdrawals, they could make £57 in interest over the course of a year.

They’d repay £1,038 for the tax charge, leaving them with £1,095, this is without taking into account that the HICBC wouldn't fall due until 31 January of the following year.

But before you get too excited about the idea of some free cash, there are some hefty caveats. You’ve got to weigh up whether the amount you can claim is worth the hassle of filling out a self-assessment tax return to repay the money. You also need to be sure you’re a disciplined person who will fill out the return by the deadline and pay any tax owed on time. If not, you could face fines that counteract any benefits.

If you usually pay tax by self-assessment, adding details of child benefit payments may not make much of a difference – and you may take the opportunity to leverage things like charitable payments against the tax you owe at the same time, essentially meaning you’ll keep more of the child benefit payment.

If you’re employed, bear in mind that typically any child benefit you need to repay will come off your tax code for the following year. This means your take-home pay will be reduced while you repay the benefit – so this will have an impact on your monthly income.

Don’t forget that, regardless of who claims the child benefit, it’s the highest earner who must repay it. This means your partner could be liable for repaying it, even if you have claimed it.

Consider other options

While earning interest is one method you might want to think about, there are other ways to avoid or at least mitigate the high income child benefit tax charge.

The HICBC is calculated on 'adjusted net income', that is to say total taxable income minus certain tax reliefs, for example: trading losses (for the self-employed), Gift Aid charity donations, and pension contributions.. 

Think about pension contributions

You may want to look into using pension contributions as a way to take your taxable income down to £50,000 meaning you won’t have to repay any child benefit.

Let’s say, for example, you have an income of £60,000 and three young children.

If you paid £10,000 (gross) into a pension, this would allow you to keep your £2,901.60 of child benefit. Given that higher-rate tax starts at an income of £50,270, you would also obtain 40pc tax relief on almost all of your contribution.

After income tax, that £10,000 would have cost you £6,054. (This is based on getting 20pc tax relief on £270, and 40pc tax relief on £9,730 – giving a total tax relief of £3,946).

But you would also have been able to keep your £2,901.60 of child benefit. As a result, the true cost to you would have been just £3,152.40. That’s the equivalent of just over 68pc ‘tax relief’.

Make sure the right person claims child benefit

If you are in a couple where one person works and the other looks after the children, you need to make sure it’s the non-working partner who claims child benefit.

St Albans Accountant Chris Wallace said:

“This will ensure that the individual builds up national insurance credits, which will boost their state pension entitlement. The working partner will already be receiving these credits through their employment.”

Take care with charitable donations

If you are in a couple and the higher earner’s income is at or around the £50,000 to £60,000 level, it makes sense for any donations to charity to be in the higher earner’s name. This will mean you make the most of the Gift Aid rules, and might also mean you keep more of your child benefit.

Gift Aid works by increasing the basic rate 20% tax band for higher earners to the grossed up value of Gift Aid qualifying charitable donations they have made in the tax year. In other words if you donate £100 to charity - they claim Gift Aid to make your donation £125. You pay 40% tax so you can personally claim back £25.00 (£125 x 20%).

For example; if the higher earner's income is £51,250 pa then they would be due to repay 12.5% of the Child Benefit received. However, the HICBC is calculated on 'adjusted net income' so a qualifying charitable donation of £1,000 would be grossed up to £1,250 and deducted from their gross income bringing it back down to £50,000. There would no longer be a HICBC to pay. If they had two children then the HICBC saving would be £259 - add this to the Gift Aid tax relief of £196 and this would reduce the cost of a £1,000 charity donation to £545.

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