Parents increasingly caught by child benefit trap over past decade

January marks 10 years since the Child Benefit tax charge was introduced and Royal London, the UK’s largest mutual life, pensions and investment company, is raising concerns as more and more parents are being caught out by the tax charge.

• For households where Child Benefit is claimed, if one person has earnings over £50,000 then a tax charge applies. Once earning over £60,000, the tax charge is the same amount as the Child Benefit.
• The starting amount hasn’t increased from £50,000 since the introduction of the charge in January 2013.
• It’s also important to think about pensions in relation to Child Benefit. 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 (NI) ‘credit’. The purpose of the credit is to make sure that parents who are not working because they are looking after a child don’t 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 1/35 of a pension – this is roughly £275 per year on the pension at retirement or £5,500 over a typical twenty-year retirement.

Clare Moffat, pensions and legal expert at Royal London says:

"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. Pension contributions and gift aid donations reduce income which can take someone out of the Child Benefit tax trap or mean they pay less of a tax charge while also increasing their pension pot.

"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."