Child benefit and loss of State pension credits

High income child benefit charge continues to leave a nasty footprint, this time on State pension entitlement.

In a recent policy paper, The mothers missing out on millions, published by Royal London, new mothers may have lost out on more than half a billion pounds in State pension rights in the last three years due to complex rules linking the State Pension to Child Benefit claims. Many people continue to be surprised that a claim for child benefit, the level of their (or their partner’s) income and the future entitlement to the State pension are connected. Such is the complexity of our tax and benefits system.

The High Income Child Benefit Charge (HICBC), was introduced in January 2013, amid much criticism. Basically, in a household where child benefit is claimed and which has someone earning over £50,000 a year, some or all of that child benefit will have to be paid back. We have pointed out somepeculiar outcomes of this to the government before, including the following:

  • In a household with two people earning £50,000 each, there is no clawback. However, if one of them earns £60,000 and the other nothing, the child benefit is repayable in full.
  • The HICBC is paid by the higher earner for the period in question, which may well not be the person who has received the money. Often the person paying the charge will be repaying child benefit that they personally have not received. It might not even be child benefit for that person’s own children.
  • Someone with five children and an income of between £50,000 and £60,000 a year will be paying tax at a marginal rate of over 80%.
  • Independent taxation of individuals can force financial discussions between a couple living together they may not want to have, just to find out who earns the most.

To avoid the position where, let us say Mrs Smith claims for and receives child benefit, but which Mr Smith, being the higher earner, has to pay back, Mrs Smith can simply choose not to claim her Child Benefit. This may be a mistake as we shall see.

The new State pension

You’ll be able to claim the new State Pension if you’re:

  • A man born on or after 6 April 1951
  • A woman born on or after 6 April 1953

If you reached State Pension age before 6 April 2016, you’ll get the State Pension under the old rules instead.

The earliest you can get the new State Pension is when you reach State Pension age.

An individual will usually need at least 10 qualifying years on their National Insurance record to be entitled to the new State Pension. For the full pension an individual needs a record of 35 qualifying years.

Most people will build up qualifying years by working and earning enough each week to exceed various National Insurance contribution thresholds. But those who are unemployed, ill or a parent or carer may also get National Insurance credits. So a person claiming child benefit for a child under 12, usually the mother, can earn National Insurance credits, BUT ONLY IF SHE CLAIMS Child Benefit. She doesn’t, however, actually have to take payment of it.

So what Mrs Smith should do if she and her husband don’t want the bother of the HICBC, is to make a claim for child benefit using Form CH2 in the usual way, but then to tick the relevant section on the form to say she doesn’t want it paid. In fact, if she never returns to work at all, she will then continue to ‘earn’ qualifying years until her child is 12, so 12 qualifying years. Of course, if she has another child at some stage, she will need to go through the same process again if she want to carry on accumulating qualifying years based on the age of her younger child. If you space your children well, you could earn quite a lot of years without ever returning to work.

We are concerned about the loss of future pension rights for new mothers in particular, who may decide not to bother to claim child benefit because of the HICBC complications. If the Royal London estimates are correct, around 125,000 mothers missed out on earning qualifying years during 2015/16.

You can check your National Insurance record online through your Personal Tax Account.