Royal London warns that more and more parents are being caught by the Child Benefit tax charge and risk being penalised in retirement, with the starting amount remaining at the same level over the past decade.
Currently, households where one person earns over £50,000 must pay a tax charge. Those earning between £50,000 and £60,000 must pay 1% of their child benefit for every £100 of income between £50,000 and £60,000. Households where one person earns in excess of £60,000 must repay all of their child benefit.
The threshold has remained unchanged since the rules were introduced in January 2013.
Clare Moffat, pensions and legal expert at Royal London, said: “This tax charge has caused many problems since its implementation ten years ago. More and more families are being caught by this tax charge as the earnings threshold hasn’t changed since it was introduced. If it had increased with inflation then the starting amount would be over £63,000.
“At a time when costs are high, it can feel like families are being further penalised. It can also feel unfair as you could have a couple earning £49,999 each and the charge wouldn’t apply but it would apply if there was only one earner in a household and they earned over £50,000. It’s also worth remembering that if someone without children moves into a household with children then they could also be caught by this tax charge.”
Royal London said families often decide not to claim child benefit because of the tax charge but this can have implications for state pension if there is a non-working parent.
A parent claiming Child Benefit for a child under 12 benefits from a National Insurance ‘credit’. This is to ensure that parents who are not working because they are looking after a child do not lose out when it comes to their state pension.
A year of NI credits builds up the same amount of state pension as a year in paid work paying NI contributions. Given that 35 years of contributions are needed for a full state pension, just one year of credits can be worth 1/35th of a pension, equating to £275 per year on the pension at retirement or £5,500 over a typical twenty-year retirement.
Moffat added: “It is quite right that parents who are looking after children get protection for their state pension record if they are out of paid work. Increasingly parents aren’t applying for child benefit but they need to make sure that they have still officially ‘claimed’ Child Benefit even if they have chosen not to receive payments. This means that they will still receive the credits. But this protection only works if the non-working parent claims Child Benefit. Missing out could mean that many thousands of parents are penalised in retirement.”
