For high-flying parents who earn more than £50,000 a year, the child benefit system will seem ridiculous.
You go through the effort of applying for the benefits (over the course of a year, this amounts to £1,000 for the first child, and £700 for each additional child), only for the money to be clawed back by HMRC through extra income tax.
For a parent with an annual salary of more than £60,000, the extra tax completely cancels out the value of the child benefit received. And to make matters worse, HMRC slaps high-earning parents who have received benefits with a penalty charge if they fail to declare that they were due to pay additional tax.
So with all this in mind, it’s hardly surprising that tens of thousands of parents aren’t bothering to claim child benefits at all.
However, the worry is that opting out will have repercussions later down the line, because it means that stay-at-home parents won’t be entitled to a full state pension when they reach retirement age.
“Unless they register for child benefits, a parent who takes time off work to look after children will lose the National Insurance (NI) credits needed to qualify for state pension, so failing to claim could prove costly in later life,” warns Stephen Lowe, group communications director at Just Group.
While mums and dads who remain in full-time employment keep their record covered by paying NI contributions through their salaries, for parents who choose to stay at home to look after the kids, not claiming the credits could cost you 1/35 of your state pension after one year off work.
With the state pension currently set at £164.35 a week, that means £244.18 lost in a year. Over an average 20-year retirement, this totals £4,884 in lost pension money – just by not claiming credits for one year.
A stay-at-home parent who has failed to claim for the past five years would lose five years’ worth of NI credits, which amounts to £24,418 over the course of an average retirement.
The other issue is that the backdate window for claims is just three months, meaning that parents who recently found out that they’ve lost out on years of credits towards their pension can’t do anything about it.
The problems have come about because of the introduction of the Child Benefit High Income Charge in 2013. Within a year of implementation, half a million people who were already registered decided to opt out of receiving the benefits (and that doesn’t include those who weren’t already signed up to the system).
It’s also estimated that take-up fell from 96 per cent in 2013 down to 93 per cent in 2017, according to figures from HMRC.
Given that most stay-at-home parents are women, the child benefit issue is also exacerbating the gender retirement gap, with women ending up with smaller state pension pots than men as a result.
And Lowe points out that the reduced state pension problems will disproportionately affect those parents with children born since 2013, because anyone with older children is likely to be registered for child benefits, even if they later opted out when the earnings rule was imposed.
Former pensions minister and director of policy at Royal London, Steve Webb, agrees that the model has some major flaws. “The system was originally designed to protect the pension record of stay-at-home parents, but the impact of the new child benefit rules has been to drive a coach and horses through that protection. It is quite unfair to penalise new parents for staying at home to look after their children.”
Webb also highlights that very few new parents will make a connection between not claiming child benefits now and getting a lower state pension in future.
“It is vital that HMRC relaxes the draconian rules on backdating so that people who realise that they are affected by this issue can do something to put things right,” he says. “Relying on new parents to study child benefit forms handed to them in a bundle of paperwork straight after a birth is simply not working.”
Through a petition, Royal London is urging the government to lift the strict limits on backdating, so that parents can make a claim back to 2013 if necessary. With so many people in the dark, the petition also encourages the government to use other means like birth registers to identify parents who are missing out on child benefits, and contact them directly.
It has now passed the 10,000 signature mark, which means that the government has to give a formal response.
For now, Webb suggests that parents who earn more than £60,000 a year should still apply for child benefit, but tick a box to say that they don’t want the cash, just the credits, therefore saving sums of money being moved around needlessly.
What’s clear is that we should not be punishing stay-at-home parents. It’s a shame that this system has ended up penalising the very people it was designed to protect.