Laura Suter: The complications of child benefit

If you pair a sleep-deprived parent with a Government handout that's linked to your future pension payouts, and then whack on a block for high earners, you get the nightmarish current system.

The process at the moment means that you get child benefit, paid at £20.70 a week for your first child and £13.70 a year for your second child, meaning a parent with two children will get £1,788.80 a year.

However, if either half of the couple earn more than £50,000 they will start to lose this. For every £1,000 they earn over £50,000 they will lose 10% of their child benefit - so £178.88 - until it is entirely wiped out at £60,000.

For these parents it works out at an effective tax charge of 57.89% on their earnings in this bracket, rather than the 40% income tax rate they should be paying. There are ways around this, particularly if you've only just tipped over the £50,000 limit, by making pension contributions or donating to charity.

But many people in the higher echelons of this earnings bracket will just decide it's not worth it and not claim the child benefit. This is particularly the case because of the convoluted way that people hit by the High Income Child Benefit Tax Charge have to deal with it - they are paid the benefit and then have to pay it back through a tax charge, depending on their income. This means they need to fill in a self-assessment tax return and pay back money they've already received.

Take someone earning £58,000 with two children (and assuming they're not making pension contributions). They will receive £1,788.80 a year in child benefit but will then have to pay back £1,609 in the tax charge. They may decide that the £180 difference is not worth the hassle of the admin and having to fill out a tax return.

But - and it is a big but - by opting out altogether their spouse will miss out on National Insurance credits. Because child benefit is linked to NI credits for those not working, it means that forgoing the entire child benefit also means forgoing potentially lucrative NI credits.

As it is still predominantly the father who is working during this time and the mother at home (although there are signs of this changing slowly) it's a further brick in the wall of the gender pensions gap.

But there is a glimmer of hope for this over-complicated system. The Office for Tax Simplification has identified it as one of the things to change in order to "improve people's experience of the tax system".

It says of child benefit: "It is unreasonable that the way the linkages in the system work mean that people can easily disadvantage themselves, especially if they cannot correct this later."

It has suggested the system be reviewed, and changed to ensure people don't miss out on NI entitlements. And also that people who've already been hit by it are able to reclaim their NI credits.

In the meantime there is a way to register for child benefit but then opt out of receiving the actual benefit, meaning you still get your NI credits. This is not well understood, and needs to be better publicised, but it exists as a fix for now.

Laura Suter is a personal finance analyst at AJ Bell

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• Topics
• Regulation
• child benefit charge