Opted out of Child Benefit? You could be harming your State Pension.
Updated: Oct 22, 2019
Even if you later opt out of receiving child benefit, it is highly recommended that you do so in order to preserve your entitlement to your own state pension.
In order to qualify for a full state pension a person needs to have 35 qualifying years of national insurance contributions under their belt. The most obvious way of qualifying for a year is by paying sufficient National Insurance Contributions for each week of that tax year. For employees this means Class 1 NIC whereas this is Class 2 NIC for the self-employed.
However, as life gets in the way and we flit between jobs or take time off to look after our children in their younger years, we may be in need of National Insurance credits to fill the gaps in our records to complete a qualifying year (or years).
These can come in various shapes and sizes as they apply to different people for varying reasons. This may be because the individual is unemployed, disabled or looking after someone else. There are 2 types of National Insurance Credits, Class 1 and Class 3. Class 1 counts for state pension and towards some contribution-based benefits such as contribution-based jobseeker's allowance. Class 3, on the other hand, credits count towards the state pension only.
Depending on the reason for the credits, some are given automatically and some must be claimed.
National Insurance credits are also available to people over the age of 18 who are partaking in a government-approved training course and to individuals who are on jury service.
So where does Child Benefit come into all of this?
Parents registered for child benefit for a child under 12 receive Class 3 credits automatically. This ensures parents and those working part-time but nor earning above the NIC threshold are able to bring up their family whilst building up their state pension entitlement.
However, things have got a little bit more complicated since the introduction of the High Income Child Benefit Charge (HICBC). This essentially means that the HICBC eases back on child benefit when the income of the highest earner reaches 50,000. This grows at a rate of 1% of the child benefit paid for each £100 income which exceeds £50,000. Then at £60,000, the child benefit is equal to the HICBC for that year. As an unsurprising result, many high earning parents have not registered for child benefit. For why would you want to make a claim when all the money was going to have to be paid back?
Well, this is actually a mistake at the cost of your own state pension.
Each year that child benefit is successfully claimed provides a qualifying year for a person who man not otherwise have a full year of National Insurance Contributions.
With only one child, a stay at home parent could lose out on 12 qualifying years as a direct result of not claiming child benefit. This is an extremely large proportion of the qualifying years needed to be eligible for your full state pension. Of course, this number can increase with the more children you have.
A recent figure from HMRC revealed that over 200,000 parents may be in this situation and are ask risk of losing even more of their state pension entitlement.
What can I do?
To avoid losing out on more qualifying years of your state pension, we recommend parents affected by the HICBC should claim the benefit on form CH2.
If you want to avoid having to pay back the benefit in the form of the HICBC, you can easily opt to stop receiving it. Here is a link to the online form you need to fill. Then, if circumstances change and you would like to restart the benefits payments, you can complete this online form. Please also note: claims for child benefit can only be backdated for three months so we do advise you take action quickly.
So there you have it, a quick bit of paperwork can have a huge impact.
If you would like additional support for tax planning, please do get in touch with Catherine on 01423 431889 or email her at firstname.lastname@example.org for your FREE initial one-hour consultation.