Opt Out and you Lose Out
Is the High Income Charge putting you off registering for Child Benefit? It’s simple, says Chris Bryans CEO of Financial Consultancy, Richmond Wealth. Stay in and you can come out ahead… sooner or later.
Parenthood is one big decision after another! But now we’re faced with a new and confusing dilemma: whether to bother registering for Child Benefit if your income means you’ll be hit by the High Income Child Benefit Charge. But did you know that not signing up for Child Benefit now could affect your retirement income later?
Mums are usually the ones who claim the benefit. Yet with more mothers working, they are increasingly losing out due to this Tax Charge introduced in 2013. Families with one stay-at-home parent are hit particularly hard, as the charge is based on total household income.
How the Charge could affect you
Introduced in 2013, the Charge lets the government take back as tax the money families who earn more than a set income receive in Child Benefit. It’s not a small amount to lose and you don’t have to be earning a small fortune to be affected.
The government starts to claw back Child Benefit if you or your partner earn over £50,000. You lose it altogether if one of you earns over £60,000, regardless of the other partner’s wage. This is not just salary; other benefits, like a company car and bonuses, may count towards the £50k. And those perks can add up at tax time, because parents who fall between the 50k to 60k earnings band now have to complete a tax return. For households who do not have a set income, so that earnings can fall below or above these amounts, the Charge is an added stress.
The hassle factor, lack of information and a government policy that appears to discourage ‘higher earners’ from seeking Child Benefit means that parents are unsure whether to register or not. Many families are simply opting out. It’s only going to get worse as the number of families potentially affected is expected to rise in line with wage hikes over the next 5-10 years. More than 365,000 people opted out of Child Benefit when the tax charge was introduced in 2013.
What do you lose by opting out? Plenty.
Child Benefit for one child is worth £1,076 in the 2017/18 tax year and for two children, £1,788. That equates to: £20.70 per week for your first child, £13.70 a week for the second or £700 a year for any additional children. Though these are not small sums, you still might wonder whether it’s worth the bother of claiming. Yes it is. This benefit can be extremely important for the stay-at-home parent. The process of claiming Child Benefit until the youngest child is 12 means you continue to get National Insurance credits towards your state pension, even if the government claims back the benefit through taxation. Your child will also get a National Insurance number issued automatically at age sixteen.
You can also save hassle when you register for child benefit by asking the HMRC not to pay it to you. That way, you still get National Insurance credit, but don’t have to go through the process of completing a tax return and paying extra tax.
For those families with unpredictable incomes – not only is the regular monthly benefit very handy; you’ll be kicking yourself the year you fall below the threshold and could have been entitled to every penny of Child Benefit tax free, but you stopped claiming because government policy did not make it attractive.
A pension contribution will save the day
The smartest move you can make right now? Making a pension contribution could reduce your earnings below £50,000, giving you the best of all worlds. You are eligible for your Child Benefit – the monthly payments now and no tax penalty later on – and you enjoy the normal tax relief on your pension contribution. And no filing a tax return either.
A family with two children, earning £60,000 per year who pay £667 per month into a pension would get £10,000 credited to that pension. On top of that, this family will enjoy an extra £2,000 in tax relief and the £1,800 in Child Benefit. Yet the total annual cost to make this £10,000 pension contribution is just £4,200. And don’t forget that when you take money from the pension you get 25 per cent tax free, so you have gained a further £2,500!
I know what you’re thinking: “It all sounds great, but how can anyone with a couple of kids have £667 left over per month to pay into a pension?” It could make sense to use other savings, part of an inheritance, or a bonus to fund the pension contributions. As investment options go these days, it is an excellent long-term strategy, ensuring you have something left over after the costly business of raising children and seeing them successfully launched into independent life. Thinking ahead is especially important considering we are living longer and will have many more years of retirement to save for. But this way, you have more money for right now too.
Securing your future
The Cridland Review (March 2017) which looked into possible changes to the State Pension Age sounded alarm bells due to the large numbers of households opting out. It expressed concern that the hundreds of thousands of parents who have so far given up their Child Benefit may be unaware of the potential implications for their retirement and are in danger of receiving a reduced State Pension. The Cridland Review highlighted the need for better communication from Government to encourage people to build up as much State Pension as they can through Child Benefit credits.
Help to escape the ‘tax trap”
Seeking advice from a chartered financial planner is a wise move if you or your partner could be caught by this charge. I also urge any high-earning families with a stay-at-home parent, who are considering not claiming Child Benefit because of the tax charge, to register and continue to earn National Insurance credits.
Children aren’t cheap, as my wife always reminds me. So the loss of monthly Child Benefit, even to save hassle, can be a real dent. Especially when you could well have the option to save for the future and preserve the benefit payments at the same time. So don’t be tempted to throw out the baby with the bathwater. With a bit of clever planning you can still use this benefit to ensure you come out ahead, now and later in life.