Thousands of mothers are missing out on state pension rights when they don’t have to because of the changes to the Child Benefit system for higher earning families.
In January 2013, the Government introduced something called a ‘High Income Child Benefit Tax Charge’. Under this scheme, where one or both parents in a family receiving Child Benefit have an income over £50,000 per year, a tax charge is incurred.
The tax charge is levied at a rate of 1% of the Child Benefit in payment for each £100 of annual income over £50,000.
For someone with an income of £50,200, the charge would therefore be 2% of their Child Benefit, whilst for someone with an income of £60,000 or more, the tax charge would be equal to 100% of the rate of Child Benefit in payment. The tax charge cannot exceed the total amount of Child Benefit being paid.
Nearly half a million child benefit recipients (overwhelmingly mothers, but can be father’s too) have ‘opted out’ of receiving child benefit. Rather than continue to receive child benefit and incur a tax charge on the higher earner, these mothers have simply opted out and no longer receive child benefit.
Growing numbers of mothers who’ve had their first child since January 2013 have declined to make an initial claim to child benefit, presumably because they can see no short-term financial benefit in doing so.
For the first group, namely those mothers who have previously been in the child benefit system, a transitional arrangement has been put in place whereby the National Insurance credits to which Child Benefit recipients are entitled will remain in force, even though they have ‘opted out’ of receiving child benefit.
But for the second group, no such arrangement is in place. If a new mother simply never claims her entitlement to child benefit then no credits are added to her National Insurance (NI) record. This could have damaging long-term implications for her future state pension entitlement.
In many cases, a new mother will return to paid work after a period of paid maternity leave and will thereby have a continuous record of paying NI contributions. This will protect her state pension record and so the absence of National Insurance credits will be of no relevance.
It is estimated that around 30% of the mothers who are not claiming child benefit would not otherwise build up a ‘qualifying year’ of contributions towards their state pension. As a result, they could reach retirement with a state pension below the full flat rate amount for which 35 years of contributions or credits are required. Simply because of failing to make a claim for child benefit.
It is simple to make a claim for Child Benefit to make sure that they do not lose out on valuable NI credits towards their pension. If you wish to avoid receiving child benefit and incurring a matching tax charge, you can simply tick the box to be put on a ‘nil rate’ of benefit.
Please do get in touch if you have any questions or need help with any aspect of your financial planning.
Source: Royal London
