Archived article: Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Child benefits can be a helpful boost to your weekly budget, removing money worries from an emergency run to the shop for nappies or when clothes start to feel a bit snug (even though you swear you just bought them!).
While this benefit should be a stress reliever, if the rules around it aren’t followed closely, it could end up as a bigger headache than it’s worth. This is because once you start earning a certain amount, child benefits will need to be repaid to the government. And if you aren’t aware of the intricacies, you could end up with an unexpected bill down the line.
How the high-income charge works
If either you or your partner earns over £60,200, you’ll lose some of the child benefit on a sliding scale until one of you earns £80,000 – at which point you’re not eligible for any child benefit.
If you earn over £60,000, you’ll repay 1% of your maximum benefit entitlement for every £200 you earn over that £60,000 threshold. Sounds confusing? It is. It means if you earn £70,000, you lose 50% of the benefit – because you’re £10,000 over the limit, and at a rate of 1% per £200, that equals 50%. The exact amount of money you lose depends on whether you’re claiming for one or two children.
The frustrating factor for many parents is that the high-income charge looks at each parent’s income, and not the household income. So, two working parents could each earn £60,000 and get the full child benefit, while a family where one parent doesn’t work and another earns £80,000 would get none of the benefit – even though their household income is far lower.
Be sure you know how much your partner earns
Families often find themselves with a hefty repayment bill when one person claims the child benefit but isn’t fully aware how much the other person earns. If you don’t have combined finances as a couple, it’s easy not to know exactly how much a partner earns, particularly if they don’t have a reliable income.
But to avoid getting an unwanted bill, you need to be clear about their earnings. Set a calendar reminder to check every six months that your partner is still eligible. Many couples choose to have the higher earner file for the benefit, but this can have an adverse effect. This is because whichever parent is filing for childhood benefit could get national insurance credits for the state pension if they are not working or earn less than £125 a week.
Don’t forget about the downside of pay rises
A pay rise is usually cause for celebration. But don’t forget that any change to your income could tip you into being ineligible for the full child benefit. So, once you’ve downed the champagne, you’ll need to come back to reality with a bump by working out if you’re now over that £60,000 threshold.
If your earnings fall between £60,000 and £80,000, there’s a convoluted system for how the child benefit is handled. You can claim the full child benefit and then repay the amount you’re not eligible for in your self-assessment tax return at the end of the year if you file one. If you don’t have any reason for filing a self-assessment return besides this benefit, you can contact HMRC and have your tax code switched so it is taken out through PAYE. Annoyingly, there isn’t a way to just get paid the amount of benefit you’re owed.
It will be a judgement call for each family as to whether the amount of money they’re getting in benefit is worth the hassle.
Pay into a pension to dodge the benefit cut
Your earnings figure that’s taken into account for child benefit purposes is what’s called your ‘adjusted net income’. What this complicated Government jargon refers to is your earnings minus any money you pay into your pension or gift aid donations. You can use this calculator to help you work it out.
So, if you’ve just tipped over the limit, you could put some money in your pension and still claim the full benefit. For example, if you earn £61,000 and put £1,000 in your pension, you’ll be back under the limit and be entitled to the full benefit. You’ll need to work out what that means for your finances – but if you can afford that pension contribution, it means you could boost your income.
Claim the benefit but not the actual money
You can also claim the benefit but not get the money to claim National Insurance credits, which is a must-have for any non-working parents.
It also means your child will automatically get their National Insurance card at 16, rather than having to apply for it.
Laura Suter: Director of Personal Finance
Laura Suter is AJ Bell's Director of Personal Finance. She joined the company in 2018 and is the go-to spokesperson on all things personal finance - from cash savings rates to saving for children and...
These articles are for information purposes and should only be used as part of your investment research. They aren't offering financial advice, so please make sure you're comfortable with the risks before investing. Tax benefits depend on your circumstances and tax rules may change.
