Parents may be set for a financial boost from child benefit reforms next month but high earners can already ensure they keep more of the perk by increasing their pension contributions.
Chancellor Jeremy Hunt announced plans to increase the threshold for the high income child benefit charge (HICBC) during his Spring Budget last week.
But you don’t need to wait for reforms and can already make changes to your own finances to ensure you keep more of the child benefit by increasing your pension contributions.
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Putting more into your pension could reduce how far your earnings go above the threshold, meaning you could keep thousands of pounds extra of child benefit.
Additionally, you would be saving more money towards your retirement.
“Parents often don’t realise that they can receive much more in child benefit payments by upping their pension contributions while also setting themselves up for a more prosperous retirement and taking advantage of the favourable tax relief available,” says Shaun Moore, tax and financial planning expert at Quilter.
“Although this does mean that someone has to increase how much they are saving for retirement, the benefits mean that the ultimate gain far out strips the spend.”
What are the child benefit reforms?
Currently, child benefit starts to get withdrawn if one parent earns more than £50,000 a year.
Under the HICBC, a parent has to re-pay the benefit at a rate of 1% of the benefit amount for every £100 they earn above the threshold.
This means that if they earn £55,000, they lose 50% of the benefit.
The threshold will increase to £60,000 from the new tax year in April and the top of the taper will go up to £80,000, which is the point where all the benefit is repaid.
Hunt said that by April 2026, the plan is to move to a system of household income, rather than based on individual parents.
How increasing pension contributions boosts child benefit
The child benefit reforms are expected to take 170,000 families out of paying the tax, meaning they can keep their full amount of child benefit.
If you’re still eligible for the charge, it’s possible to reduce the impact and end up net better off by increasing the amount you pay into your pension via salary sacrifice, says Mike Ambery, retirement savings director at Standard Life.
“Paying into your pension reduces what counts as your income, and it could allow you to keep your child benefit and boost your pension savings at the same time," says Ambery.
“When the change to basing the charge on household income kicks in some people will find salary sacrifice a more viable option than before as it will be possible for both earners to sacrifice more of their salary, retain child benefit and still have two good incomes - previously it could have made manging the monthly budget harder in the short term.”
From the new tax year in April, parents receiving child benefit will get £25.60 a week for an eldest or only child, and £16.95 for other children.
Analysis by wealth manager Quilter shows a 40-year-old parent earning £75,000 with two young children who contributes £200 into their pension each month would currently get to keep £553.15 of child benefit each year.
By increasing their pension contributions to £600, the higher earner’s adjusted salary would be £63,000 and they would be able to keep £1,327.56 per year of child benefit.
That equates to £15,930 over 12 years instead of £6,637.
Additionally, that extra money in your pension could boost the amount of money you have towards your retirement.
Assuming a modest growth of 2% after charges and inflation, the long-term result would also be to increase their pension pot by £167,364 at age 68, according to Quilter.
"Although this does mean that someone has to increase how much they are saving for retirement, the benefits mean that the ultimate gain far out strips the spend," adds Moore.
"There is still a significant proportion of people in the UK who are not saving enough for retirement and utilising this quirk in the system could help them achieve their retirement aspirations."
The importance of taking child benefit for your pension
Thousands of parents have opted out from taking child benefit, particularly if they earn above £80,000.
This would remove the hassle of completing a self-assessment tax return to pay the HICBC.
But Alice Guy, head of pensions and savings at interactive investor warns opting out could reduce your state pension entitlement.
“The high level of those not claiming child benefit raises concerns that parents are unwittingly missing out on valuable National Insurance credits, which could potentially boost their state pension in future,” she says.
“To receive a full state pension you need 35 years of either national insurance payments or national insurance credits. Claiming child benefit gives you a national insurance credit if your child is under 12 and therefore could increase your state pension when you retire.”
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