Child Benefit – Think Before You Disclaim

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The Child Benefit tax has received a lot of press. But there’s one aspect that’s received little attention, namely the interplay with NI credits and the effect disclaiming Child Benefit can have on your state pension entitlement. What’s the full story?

Child Benefit tax – recap

The much criticised tax charge linked to Child Benefit has been in place since January 7. Its purpose is to claw back benefit where the recipient or their live-in partner, married or not, has annual income of £50,000 or above. The tax charge is set so that where either partner’s income reaches £60,000, the extra tax wipes out the benefit.

Some people with income of £60,000 plus have opted to drop their claim to the benefit in order to avoid hassle over the tax charge. But experts now point out that this might lead to trouble.

NIC credits

Entitlement to the basic state pension is linked to your NI record. You need 30 qualifying years of contributions to be eligible for the full basic amount. However, the NI system includes help for those people who are unable to work, for example, because they’re ill or they care for someone else. To prevent them losing out, NI credits are given to bolster their state pension entitlement.

Credits and Child Benefit

A carer’s credit is awarded to a person who’s in receipt of Child Benefit for a child who is under 12. This means people who aren’t working because they are bringing up children accumulate qualifying years on their NI contributions record. So far, so good.

Benefit and clawback mechanics

The trouble can start where one parent stays at home to bring up a child and the other goes out to work. Where the working parent has income in excess of £50,000, the clawback tax will be taken from their pay.

Trap. This applies even where the working partner isn’t the parent of the child they are living with. They only have to be resident in the house with the carer-parent for two weeks before the clawback tax bites.

Protecting state pension entitlement

HMRC sent letters to those it thinks might be affected. This lists options, one of which for those liable to the full clawback is to simply stop claiming the benefit. What the letter doesn’t say is that this is only OK for the carer-partner if they earn above the lower earnings limit (LEL) for NI purposes (currently £107 per week, £109 per week for 2013/14), because this will generate a credit to their NI record. Where they don’t work or earn less than the LEL, they might lose out.

Below are some business and tax tips:

Trap. Stopping the Child Benefit results in the loss of the associated NI credit. And where this causes the carer-partner’s NI record to show less than 30 qualifying years, their state pension entitlement will be reduced. What’s more, by the time they realise this it could be far too late to do anything about it.

Tip. The good news is that the solution to this problem is simple. Continue, or reinstate, your claim for Child Benefit and pay the clawback tax charge. If redressing the financial imbalance between you and your partner is important to you, it’s a simple matter of the one receiving the benefit handing it over to the one paying the tax.

Disclaiming Child Benefit to avoid the hassle of the clawback tax can affect your state pension. Where the person who is entitled to the Child Benefit has income below the NI lower earnings limit, currently £107 per week, they should continue to claim it to preserve their pension entitlement.

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Posted in Tax Tips

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