Interactive Investor

Will your family gain from the child benefit reforms?

The government delivered a welcome shake-up to the child benefit system at this year’s Spring Budget. Rachel Lacey outlines what’s changing, and explains how it might affect you and your family, and how they actually calculate your income.

19th March 2024 11:06

by Rachel Lacey from interactive investor

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Never mind the 2p cut to national insurance (NI), for parents of a certain income, the cuddliest bunny to be plucked from the chancellor’s hat in last week’s Budget was the proposed child benefit reform.

At long last, Chancellor Jeremy Hunt announced that the government would finally tackle the unjust anomaly that sees a household with a single income over £50,000 start losing their child benefit, but households with a joint income of £100,000 (where each earns £50,000) get it paid in full.

The contentious High-Income Child Benefit Charge was introduced in 2013 and it applies to any household claiming child benefit, where one person earns more than £50,000 a year, at a rate of 1% of the payment for every £100 over that threshold. This means that once one partner’s income exceeds £60,000 a year, the value of the child benefit is completely wiped out.

However, the chancellor has now confirmed that the government will tackle both the anomaly that penalises single parents and households where only one parent works and increase the point at which you’re hit with a charge.

The changes mean that many more families will get to claim some child benefit – and a simple financial planning hack means many that might think they earn too much could stand to benefit too.

What’s changing?

From April 2026 claims for child benefit will be based on the combined income of both parents in a household and a consultation on how this will work will be launched. The two-year time frame is because HMRC needs to consult on how it will make assessments based on couples’ rather than individuals’ income.

But, in the meantime changes will be made to the threshold for the point at which families need to start repaying child benefit – something that hasn’t happened in more than a decade.

From April this year, the threshold for the High-Income Child Benefit Charge will be increased from £50,000 to £60,000 – a move the government estimates will benefit some 180,000 families.

The rate at which child benefit is clawed back will also slow down, meaning families won’t have to repay all their child benefit until one partner’s earnings go over £80,000 a year, creating less of a cliff edge hit to family finances.

Myron Jobson, senior personal finance analyst at interactive investor, says: “The fact that the threshold for the High-Income Child Benefit Charge hasn’t risen in line with earnings since it was introduced in 2013 has been a source of contention among parents - especially given the rising cost of living which has put extra pressure on household budgets.”

For a sole earner on an income of £60,000 a year with two children, next month’s changes to the threshold will mean they will be able to claim £2,212.60 in child benefit a year, without losing any of it to the High-Income Child Benefit Charge.

For a two-child family where one parent earns £70,000, they’ll have to pay 50% of their child benefit back but will still be left with £1,106.30.

Under the current rules, both of the above parents would be able to claim child benefit, but they would need to pay all of it back.

From April 2024, child benefit payments will rise from £24 to £25.60 a week for eldest or only children and from £15.90 to £16.95 a week for each of their siblings.

The child benefit fallout

But it’s not just the cost of the High-Income Child Benefit Charge itself that causes problems for families – it also causes an admin headache that has the potential to open up a whole new can of financial worms.

The charge needs to be paid by the higher earner through a self-assessment tax return – something many affected people wouldn’t otherwise need to do. For that reason, lots of parents simply decided to opt out of child benefit. What, after all, is the point of claiming a benefit, only to complete a tax return that forces you to pay it back?

However, stopping child benefit can inadvertently affect the lower-paid partner’s entitlement to the state pension.

That’s because child benefit claimants with children under the age of 12 are able to get national insurance credits and, to get the full state pension, you will need to have at least 35 years of national insurance contributions. So, by opting out of child benefit, thousands of people (typically stay-at-home mums) could be missing out on the vital credits they’ll need to qualify for the full payment when they eventually reach state pension age.

In April last year, the government acknowledged this problem and announced that it would be putting in place the means to allow people to retrospectively claim for any national insurance credits they may have missed out on. It is yet to confirm how this will happen but it has stated parents should be able to make backdated claims from April 2026.

Get your child benefit back

The changes will come as great news for many parents earning over £50,000, even if some of the proposals won’t be put in place until April 2026.

But it’s important that any parents who opted out of child benefit, who may now be eligible for some or all of the benefit register for it. If you have never claimed child benefit, this will involve applying from scratch. Alternatively, if you have previously claimed child benefit but opted out of receiving payments, you can ask for them to be restarted online at HMRC.

However, even if you earn more than £60,000 a year, you might be able to take steps to get all or some of your child benefit back.

This is because the thresholds HMRC uses are based on your so-called adjusted net income, which means that it is based on your income after certain deductions may have been made, including pension contributions.

So, the more money that you pay into your pension, the lower your income will be for the purposes of your High-Income Child Benefit Charge calculation. For example, if you earn £65,000 a year, but ensure you pay at least £5,000 into your pension, you will be able to get your income down to £60,000 and keep all your child benefit.

Alternatively, somebody earning £80,000 a year, could reclaim half their child benefit by ensuring they paid £10,000 into their pension, taking their net adjusted income down to £70,000.

Retirement win

Increasing your pension contributions to lower your income for child benefit purposes can be an incredibly tax-savvy move and provide something of a financial triple whammy. Not only are you reclaiming some or all of your entitlement to child benefit, but you are also paying more into your retirement savings and getting the benefit of higher-rate tax relief on those contributions.

You can either talk to your employer about increasing pension contributions into a workplace pension or increase payments into a personal pension you have arranged yourself such as a self-invested personal pension (SIPP).

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