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When former chancellor George Osborne introduced a controversial new charge on “high income” couples in receipt of child benefit, few people spotted the problems this would cause for hundreds of thousands of parents in terms of their future state pension rights.
In this column I want to explain what the problem is, what you can do at the moment to put it right, and how the Government ultimately plans to undo the damage which has been done.
The problem started in January 2013 when the “High Income Child Benefit Charge” was introduced. Under this system, if one parent claims child benefit and they or their partner earn over £50,000 per year, a charge is due to HM Revenue and Customs.
The amount of the charge is on a sliding scale, but those earning £60,000 or more end up with a bill which exactly matches the child benefit they receive as a family.
To make matters worse, the £50,000 and £60,000 thresholds have not moved for the last decade and so now bite on families who would certainly not think of themselves as “high income”.
Perhaps not surprisingly, many thousands of families have decided that it’s a waste of time to draw child benefit and then get a tax bill for the same amount. In particular, people starting families for the first time have, in growing numbers, simply chosen not to claim child benefit at all.
As a result of this, the number of families receiving child benefit has fallen every since year since 2013.
How child benefit can affect your state pension
Unfortunately, choosing not to claim child benefit means that you throw away something valuable – the National Insurance “credit” which comes with receipt of child benefit for a child under the age of 12.
If someone is at home with a young child and not in paid work, there might be a gap in their National Insurance (NI) record. But the system of NI credits (previously known as “Home Responsibilities Protection”) means that their NI record is protected for the year.
Indeed, under the new state pension system a year of NI credits for raising a child is worth just as much towards your state pension as a year spent running a big company. And, with the majority of child benefit payments going to mothers, this system is a particularly important one to protect the state pensions of women.
It is possible to see the value of these credits by looking at how they affect your state pension.
At the moment, the full state pension is worth £203.85 per week, or around £10,600 per year. If someone hasn’t yet built up a full state pension (which will be true of most parents), adding one extra year to their National Insurance record adds 1/35 of the full pension rate, or just over £300 per year.
This means that someone who doesn’t go back to work until their child is of primary school age, and therefore misses out on four years of National Insurance, could end up £1,200 per year short on their state pension if they don’t claim their NI credits.
If you were to claim the state pension until you reach 90 years of age – something that’s becoming increasingly common – it means you could potentially miss out on £30,000 of state pension payments.
How to claim NI credits only
When the High Income Child Benefit Charge was introduced, the Government foresaw that some people might react by opting out of receiving the benefit, and provided a mechanism by which people could still get their NI credits.
On the child benefit claim form there is a box to tick which says, in effect, “please don’t pay me the money, but do give me my NI credits”. This is pictured below:
The problem is, if you’ve decided not to claim child benefit, then you probably won’t ever load up a child benefit claim form in order to tick a box.
And it’s far from obvious that there would be a form required to claim a benefit which includes a box saying “but please don’t pay me this benefit”.
Can child benefit claims be backdated?
After years of campaigning, the Government has finally recognised there is a problem. In April 2023, the then-financial secretary to the Treasury Victoria Atkins MP said, in a written statement:
“The Government recognises concerns that some parents who have not claimed child benefit could miss out on their future entitlement to a full state pension. The Government will address this issue to enable affected parents to receive a National Insurance credit retrospectively. Further detail on next steps will be available in due course”.
Unfortunately, we have heard nothing since then, and so for now many thousands of parents are still at risk of missing out. The assumption is that the Government will create a new NI credit for those with an “underlying entitlement” to child benefit, and that this will be backdated to when the High Income Charge was introduced.
But we still know nothing about the details, including how people will find out about this new credit, or how they will claim it.
As things stand, the best strategy therefore would be for any parent who has never claimed child benefit to put in a claim now, and tick the box to indicate that they want their NI credits, but not the cash benefit. It is possible to backdate that claim for three months, but unfortunately no more.
The fact that child benefit claims cannot be backdated more than three months means it is vital that the Government sorts this matter out now. Although most parents will not reach pension age for some time, there will be some cases (including, potentially, grandparents who are the main carer for their grandchildren) where things are more urgent.
The whole thing has been an unnecessary mess, and risks jeopardising the real progress that we have seen in improving the state pension position of women in recent decades unless it is sorted out soon.