Child Benefit – To Opt or Not To Opt Out?
Most of us are now familiar with the ‘high income’ child benefit charge, whereby a parent is in receipt of child benefit and the parent or someone else (not necessarily the parent’s partner) living in the same household earns in excess of £50,000, then the highest earner may need to repay some of the child benefit to HMRC via Self Assessment. If the earnings are in excess of £60,000 then 100% of the child benefit received will need to be paid back.
Where earnings are between £50,000 and £60,000, it makes sense to continue receiving child benefit as the child benefit payment received will not all be repaid to HMRC. Where earnings exceed £60,000, all the child benefit is repaid so that opting out of receiving it makes sense at first glance.
Opting out could indeed be a sensible solution for couples where both parties are working and both their respective earnings are sufficient to qualify for State Pension entitlement for as long they are entitled to child benefit (e.g husband’s earnings in excess of £60,000 and wife’s earnings above the lower earnings limited). Opting out can be achieved by calling the Child Benefit Office.
However, the opting out choice could have adverse consequences in circumstances where a parent stays at home to raise the child and the person’s partner is the only one working and their earnings are in excess of £60,000. But by choosing to opt out, the carer potentially could lose out on National Insurance credit towards the State Pension. If someone is not working and receives child benefit, he/she will automatically qualify for National Insurance credits. In the absence of receipt of child benefit, the entitlement is lost where the taxpayer opts out. The knee-jerk reaction to avoid this would be to continue to receive the child benefit and pay back the child benefit back through filing a Self-Assessment tax return, but unfortunately registering for self-assessment and completing a tax return could be time consuming and would require the child benefit to be repaid by 31 January following the end of the tax year. Their acts as a major disincentive to remaining opted in and causes individuals to opt out to their own detriment.
However, there is better alternative than this; whereby the carer can continue to stay in the child benefit system but elect not to receive child benefit payments. They can do this by contacting the Child Benefit Office on 0300 200 3100 or online via the Gateway account. This ensures that the carer’s credits for state pension are preserved and the highest earner is no longer required to file a tax return purely because of the high-income child benefit charge (although they may be required to file a tax return for other reasons, unconnected with the child benefit).
The message here is that you should not opt out of child benefit without carefully considering your future pension position. It will almost always be better to ensure you remain in the system but simply elect not to receive the benefit, to preserve future State Pension entitlement.
Blog written by Maria Mekseniene
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