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Child benefits: Why you shouldn't opt out
Since 2013, families where the higher earner has an income of more than £50,000 have had their child benefit entitlement proportionately reduced.
Where the income of the higher earner exceeds £60,000, the entire benefit is withdrawn. If child benefit has been claimed, the practical result is an income tax charge on the higher earner equal to the benefit to be repaid.
To avoid the hassle of receiving the benefit to simply pay it back, many parents have mistakenly opted out of the child benefit system altogether.
What is the problem?
The State Pension is based on eligible credits. To qualify for a full State Pension each individual needs 35 years of credits, which are obtained through the National Insurance contribution system.
In years where the individual is working and earning over a specified amount, the contribution is easy to establish as it has monetary value, however there has for many years been a credit available for parents who are bringing up children.
This entitlement has been logged through the entitlement to, and claiming of, child benefit. If a parent opts out of the child benefit system and isn’t paying or being credited with NI contributions through another route, it is possible that their ultimate State Pension (such as it may be) will be adversely affected as there is no relevant contribution record for the period.
The member of the household in need of the NI credits that are available when caring for a child under 12 should ensure they claim child benefit, even if they choose not to receive the actual child benefit payments.
The solution
It is hoped that this anomaly will be rectified at some point, but in the meantime, for the avoidance of doubt, it would be safer to claim the child benefit and pay it back to secure the credit and full entitlement to the state pension.
If you are certain that you will have to repay all of your child benefit you can opt out of receiving the payments when you make your application for child benefit.
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This article featured in Summer 2019 edition of TPO Insight, our quarterly financial news magazine.
In this edition, we are continuing our financial planning for businesses series, this time looking at how to protect surviving shareholders in the event of death.
Other articles featured include:
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A look at how to get better returns than NS&I offers;
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The first in a two-part series discussing behavioural investing;
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The new restrictions on the peer-to-peer sector