Child Benefits Rules – are you missing out?
Child Benefits Rules – are you missing out on your state pension rights?
You get Child Benefit if you are responsible for a child under the age of 16 (or under 20 if they stay in approved education/training). The current allowance for your first (or only) child is £20.70 per week and for each additional child it is a further £13.70 per week.
High Income Child Benefit Tax Charge
The High Income Child Benefit Tax Charge was introduced in 2013 and as a result any household in receipt of Child Benefit, which has an individual with ‘adjusted net income’ in excess of £50,000 p/a will start to lose their Child Benefit at a rate of 1% of the full Child Benefit award for each £100 of income between £50,000 and £60,000. This means that the full amount of Child Benefit is lost once adjusted net income exceeds £60,000 p/a.
Where both parents have income in excess of £50,000, the person with the higher income will be liable for the charge.
As a result of the High Income Child Benefit Tax Charge; many mothers have chosen not to claim Child Benefit without understanding how this can affect their future state pension benefits.
What is adjusted net income?
Adjusted net income is your total taxable income less certain tax reliefs, for example:
- charity donations through Gift Aid
- pension contributions that are paid gross (before tax relief), such as occupational pensions
- pension contributions paid via the relief at source method, such as personal pensions, group personal pension schemes, Self Invested Pension Plans
- trading losses
Claiming your National Insurance (NI) Credit
Currently, a parent (usually a mother) who receives Child Benefit for a child who is under the age of 12 will receive a year of NI credit towards her own state pension record for each tax year in which this applies. This means that you do not have to be working and paying NI contributions in order to credit your NI record.
Families who are now subject to the High Income Child Benefit charge have a choice between either registering for Child Benefit and then opting out, or not registering at all. The correct way to proceed is to complete the Child Benefit claim form and then opt out of receiving payments – this ensures:
- your NI credits are given correctly and your state pension entitlement is protected
- your child is registered to get a National Insurance number when they reach 16
As well as making sure that you are completing the Child Benefit claim form correctly, there are certain types of planning that may enable an individual or a family to retain their full entitlement to Child Benefit:
- Salary sacrifice – as long as your employer allows this, you can agree to sacrifice a portion of salary in order to reduce your adjusted net income in return for certain benefits, such as an employer pension contribution or childcare vouchers. This could result in a reduction or complete elimination of the child benefit charge, alongside enhanced pension contributions and NI savings. Bringing your overall income below the Higher Rate Tax Threshold could also mean you are entitled to a higher level of childcare vouchers
- Pension contributions – personal pension contributions will also reduce your adjusted net income which could result in full or part reinstatement of the child benefit entitlement. It could also mean that you are able to obtain a higher level of pension tax relief on the contributions you make and ultimately reduce the overall amount you pay in income tax (dependent on your circumstances).
Salary sacrifice schemes are a popular way to make tax savings however they do mean a change to the terms and conditions of an employment contract and can have a negative impact on some statutory payments, such as maternity, paternity, adoption or sick pay. Whilst salary sacrifice could enable you to save tax and NI contributions, it’s important to get professional advice before changing an employment contract.
Clear and bespoke financial planning is key to maximising the benefits available to you, as well as being in a position to potentially reduce your income tax bill, whilst also building up your pension benefits; however this is a complex area and professional advice should be sought to make sure you get it right.