The government should give National Insurance credits (NICs) to parents who failed to claim child benefit, the Office for Tax Simplification (OTS) has proposed in its latest report.
This would help people who took time off work to care for children, and have gaps in their National Insurance record as a result.
The OTS is tasked with giving independent advice on how the government could make the UK tax system easier to navigate. The latest recommendation comes from its 'Taxation and Life Events' report into how tax affects people during life-changing moments, including having a child.
Find out how the recommendations could affect you, and why opting out of child benefit could have repercussions on your state pension.
The OTS believes confusion around the child benefit system is stopping some parents from claiming it, without understanding the future impact on them and their child.
When a baby is born in hospital, the parents are offered a 'Bounty Pack' containing vouchers, health advice and a form to sign up to child benefit.
What parents may not always realise, however, is that this form can have a significant impact on their life, namely:
Indeed, parents may be opting out due to the high income tax charge, which is payable if one partner earns more than £50,000. To avoid this charge, it's possible to claim child benefit and opt out of payments, but the importance of doing so hasn't been made clear enough, the OTS said.
Although the form was revised in May 2019 to outline the consequences of not claiming child benefit, the OTS says there is still too much confusion about how child benefit connects to other financial systems and 'people can easily disadvantage themselves'.
To make it easier, the OTS came up with a number of suggestions.
By failing to claim child benefit, the parent who is out of work won't be given National Insurance credits. When you come to retire, there may be gaps in your National Insurance record, meaning you may receive less state pension.
To help bridge these gaps, the OTS has called on the government to consider restoring NICs to anyone who has lost out - although, it would have to decide whether there would be an age cut-off, or restrictions on the amount of NICs that can be restored.
But the OTS says information about child benefit should be clearer; particularly about the consequences related to state pension entitlement if you opt out. The OTS suggests the government should review the administrative arrangements to ensure people can't miss out on their entitlements.
For children whose parents opted out of child benefit, the process of getting their National Insurance number when they reach 16 can be difficult, often involving a face-to-face interview with someone from the Department for Work and Pensions (DWP).
This is impractical both for the child, and the DWP, so the OTS has recommended the government look at ways to make the service easier.
The high income child benefit charge only comes into force if you or your partner earn more than £50,000.
It's based on each individual's income, not joint income. So, if you and your partner both earn £45,000, for example, you wouldn't have to pay it.
A 'partner', in this case, counts as someone you're not permanently separated from, who you're married to or in a civil partnership with, or living together as if you were.
The tax charge equates to 1% of the child benefit that's been paid for every £100 of income between £50,000 and £60,000. Essentially, if you or your partner earn more than £60,000, you'll have to pay back all child benefit through the tax.
To find out how much you'll get, and whether you'll owe any tax, try out our child benefit calculator below:
Even if you or your partner earn more than £60,000 and wouldn't gain anything from child benefit payments, it's still worth signing up.
Instead of having to pay back the payments as tax, you can tick a box to opt out of receiving any money. This way, you can still benefit from the that come as part of being signed up to child benefit.
This is particularly important if the parent that's signed up for child benefit takes a significant amount of time off work in order to care for the child. The credits will essentially plug the gap of that you can't make while you're not working.
Your NICs are important when it comes to retirement. You must have at least 10 years' worth of contributions to get any state pension at all, and 35 years' worth the get the full state pension.
So, a few years out of work could cost you dearly if lost NICs turn out to be the difference between the full state pension or a reduced payment.