Big child benefit change announced to help boost parents’ pension
In a surprise move, the Government has announced a big change to child benefit claim rules, making it easier to notch up vital National Insurance credits for a better state pension.
As part of 23 updates to “simplify and modernise the tax system”, the Government confirmed that parents who have not claimed child benefit will be able to claim National Insurance credit retrospectively.
Experts welcome this long-awaited move, which should help close the pension gender gap and mean more parents claim the benefit, reversing the recent downward trend.
The Treasury said: “The Government wants to ensure that parents who have not claimed child benefit are not disadvantaged when they start claiming their state pension and is announcing a resolution for affected parents.
“Parents do not need to take any action immediately. The Government intends to legislate to allow eligible individuals to retrospectively claim National Insurance credit, and the next steps to be taken will be published in due course.”
Child benefit and National Insurance credits
Child benefit is paid to the parents and guardians of children under the age of 16, or under 20 if they stay in approved full-time education or training. It is currently set at £24 a week for the eldest child and £15.90 a week for each younger child.
You’ll get National Insurance credits automatically if you claim child benefit and your child is under 12.
And these credits are vital as they count towards your state pension, with those retiring under the new state pension scheme required to have 35 years of contributions to get the maximum pension amount.
However, until now, there has been a three-month time limit on backdating child benefit claims.
Shaun Moore, tax and financial planning expert at Quilter, said: “It is laughable that the rules dictate that you must claim child benefit as soon after your child’s birth as possible and can only backdate it by three months.
“Most parents can attest that the first few months after a baby is born is a blur without having to worry about filing in paperwork on top. This is a problem that has plagued the system for years, and it is astounding that it has taken this long to address it.”
Moore added that child benefit isn’t an automatic entitlement and as parents have to actively apply for it, the process can be confusing and cumbersome.
This means that thousands of parents have missed out on claiming their rightful benefits over the years, either due to a lack of awareness or the daunting prospect of navigating the bureaucratic maze with a screaming baby in your arms,” he said.
By missing out on these credits, it’s especially problematic for stay-at-home parents or those with low incomes who rely on them to maintain their pension entitlement.
According to Laura Suter, head of personal finance at AJ Bell, a missing year can mean around £3,000 less in state pension payments.
She said: “If you had a 12-year gap in your National Insurance record, leaving you short of the full 35 years of credits you’d need to be entitled to the full state pension, that would equate to £3,634 a year in state pension you’d miss out on.
“Over a 20-year retirement that would equate to £72,680 of missed state pension payments. Even shorter gaps in the record can have a dramatic impact on your state pension payments, with every year gap equating to around £6,000 in state pension payments over a typical 20-year retirement.”
Devil in the detail
More details on this change are expected in due course. Suter said: “We need to wait for the detail of the scheme to see how useful it will be. Factors like how far back claims can be made and how onerous the claims process is will have a big impact on how many people will actually be able to boost their National Insurance record and their state pension.”
And the other issue experts hope the Government will tackle is the High Income Child Benefit Charge (HICBC) which was introduced in 2013 and affects families where one parent earns more than £50,000 (net) a year.
Those with income above this figure are required to pay 1% income tax on the child benefit for each £100 of income above this. This means the value of child benefit is eroded to nil once the taxable income of one of the adults exceeds £60,000. For many of these earners, they’ve simply not bothered to claim.
The main criticism here is that this threshold hasn’t changed since its introduction, and it hasn’t kept up with inflation. If it had, it would be closer to £65,000 now.
Suter said: “While it’s welcome that the Government is helping to fix the system for people who have been short changed so far, full reform of the High Income Charge and how national Insurance credits are applied would be far better. The High Income charge should be increased from its current £50,000 to reflect rising wages and help families struggling with higher costs. On top of that, the entitlement to National Insurance credits should be made automatic when a baby is born, to stop parents having to actively claim them.”