Child Benefit has gained some attention recently in the press. The chancellor announced some immediate changes in the Spring Budget as well as a consultation into the controversial way the benefit is calculated. Castlefield adviser, Michael Owens, delves into the often misunderstood benefit and highlights some actionable changes parents can make to benefit fully from the allowance.
Child Benefit is an allowance that parents or guardians receive if responsible for bringing up a child who is under 16 or under 20 and staying in approved education. The allowance is paid for each child, usually every 4 weeks, and there’s no limit to how many children you can claim for. The current rates see parents receive £25.60 per week for an eldest child and £16.95 per week for every subsequent child. [1]
The income threshold at which Child Benefit begins to be removed has changed. Under the previous rules, Child Benefit would begin to be reduced when one parent’s earnings were £50,000 per year or more. In April this increased to £60,000. Previously the entire Child Benefit allowance would be completely taken away when one parent was earning £60,000; this has now been extended to £80,000. [2]
The reduction in Child Benefit is calculated through the ‘Income Child Benefit Tax Charge’ which cancels out what you receive in Child Benefit. How the High Income Child Benefit Tax Charge is applied depends on an individual’s ‘Threshold Income’ and ‘Adjusted Net Income’. This can start to get a little complicated but the important thing to note here is that it’s your income after certain deductions are accounted for that’s tested in the Child Benefit calculation. These deductions include pension contributions and Gift Aid donations.
For example, if the highest earning parent brings in £65,000 per tax year their Child Benefit allowance will start to be reduced. They might consider making a personal pension contribution. A contribution made to a personal pension will usually receive tax relief at source, taking a £4,000 contribution to £5,000 automatically. In this instance, their income for the Child Benefit Tax Charge calculation is effectively reduced by the £5,000 gross pension contribution back down to £60,000. They would become entitled to the full Child Benefit allowance once again.
Often parents may already be making pension contributions, and informing HMRC of the contributions is what’s needed to reduce the Child Benefit Charge. To achieve this you may need to complete a tax return so HMRC has a record of your pension contributions. By notifying HMRC of pension contributions, you can also claim higher rate tax relief on some or all of the contribution amount.
It’s important to note that tax bands for other financial calculations are maintained when making and reporting pension contributions and gift aid. If you’re unsure of the impact of such actions please consult your financial adviser.
Where a parent’s earnings reach £80,000 the Child Benefit is cancelled out entirely. It’s common for these parents to stop their Child Benefit claim so they don’t have to pay the tax charge. However, if their partner’s earnings are less than £6,396 [3] then claiming Child Benefit can be an important source of National Insurance credits which count towards your State Pension entitlement. It’s therefore important that parents with one partner earning less than £6,396 continue to claim Child Benefit.
For many years the way in which the Child Benefit Charge is calculated has been viewed as controversial. Under the current rules a household with a single earner who brings in £80,000 will have their Child Benefit completely removed, whereas a couple who each earn £60,000 are entitled to the full allowance. The chancellor announced a consultation which could see the child benefit claims be based on total household income instead of the highest earner's income. This is a welcome move but won’t come into effect until April 2026. [2]
Written by Michael Owens
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