In his latest column Neil MacGillivray assesses the complications of the Child Benefit to help advisers avoid their own version of teenage angst
One thing I never had to contend with in reality was the High Income Child Benefit Charge (HICBC) - fortunately my daughter ceased to qualify for Child Benefit just before the charge came into force in January 2013.
HICBC applies where an individual or their partner receives child benefit, and either of them has income of more than £50,000. For every £100 income above the £50,000 limit 1% of the sum of all the child benefit paid is taken as a tax charge. When a person's income is £60,000 or more then the tax charge equates to the full value of child benefit received so removing any financial benefit.
For those impacted by the HIBC they have three options:
- not to claim the benefit, or
- claim the benefit, but opt not to receive payment of it, or
- receive the benefit but pay some or all of it back through the HICBC
There can be additional consequences depending on which option is taken. What is not always understood is that, as well as providing financial support to families, child benefit has two other important links with the wider national insurance regime by:
- providing the child benefit claimant with national insurance credits until the child is 12, which can help fill gaps in their national insurance record for State Pension if they are not working
- being the main way children are issued a National Insurance number (NINO) as they turn 16
Missing out on crucial national insurance credits where a parent decides not to work and remain at home may lead to a reduction in their state pension. This reduction in state pension can be substantial if a parent has a number of children over a long period of time and could have been so easily avoided if they had been fully aware of the importance of registering.
The other problem is that the child will have to take an additional step to prove their identity to get their NINO. This may even include having to be interviewed by a Department of Work and Pensions (DWP) official. In time it is predicted this could lead to a considerable increase in workload for the DWP. Consider the hoops you already have to go through these days to get your first passport.
It is interesting to note that, of the 7.3 million recipients of Child Benefit in 2017/18, 809,000 of those had either opted out or were paying the HICBC. No estimated figures have been given as to how many may not have registered but the number involved could be high.
For those who have income of £60,000 or more registering a claim for child benefit but then opting not to receive it is the only way to avoid paying the HICBC and the associated administration, such as completing a tax return, while preserving national insurance entitlements. However there are those who may consider simply not registering on the grounds there are no financial benefits in doing so, not realising the future problems that may be created.
HMRC's own research backs up this point that the general public have a lack of understanding of the other two key reasons - around national insurance credits - for needing to register for Child Benefit.
The Office of Tax Simplification (OTS) is concerned about these two issues and in its most recent report entitled Taxation and Life Events: Simplifying tax for individuals, published in October, it made three recommendations:
- The government should review the administrative arrangements linked to the operation of Child Benefit making clear the consequences of not claiming the benefit with a view to ensuring that people cannot lose out on national insurance entitlements
- The government should consider the potential for enabling national insurance credits to be restored to those people who have lost out through not claiming Child Benefit
- The government should consider how to ease the process of enabling children of those who have not claimed Child Benefit to receive their National Insurance number
These are good proposals which should be implemented promptly, but to date the pace that OTS recommendations are taken up by Government appears slow to non-existent.
In the meantime, advisers who have clients with young families should raise the importance for registering for child benefit and the options available. By taking action now, it will prevent potential financial loss in retirement, plus having to deal with more than just teenage angst by facing admin grief when their children turn 16.
Neil MacGillivray is head of technical support at James Hay
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