State pension warning as families opting out of child benefit hits record high

The number of families opting out of child benefit has reached a record high, prompting warnings that many parents could face a smaller state pension in retirement.

About 741,000 families chose to opt out of receiving child benefit payments as at August 2023, almost double the number 10 years ago, according to HMRC.

There are now just 6.91 million families on child benefit, a fall of 1 million over the past decade. 

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The decline in parents receiving the benefit is due to the much-hated high income child benefit charge, which George Osborne introduced in 2013.

While the tax charge is being reformed and the income threshold was raised earlier this month as part of Jeremy Hunt’s Spring Budget, experts are warning that there are serious repercussions of not claiming child benefit for parents and guardians.

“These latest figures show the dramatic impact of the high income child benefit charge, knocking a million families off child benefit in just over a decade. An important knock-on effect is that hundreds of thousands of parents may have missed out on vital National Insurance credits towards their state pension,” says Steve Webb, former pensions minister and a partner at the consultants LCP.

Just one year of missed credits could lead to a reduction of £329 a year in state pension, or around £6,500 over a typical 20-year retirement.

Someone who doesn’t go back to work until their child is of primary school age, and therefore misses out on four years of National Insurance, could end up £1,316 per year short on their state pension if they don’t claim their credits. Over 20 years, this would be worth £26,320.

Webb adds that the government needs to resolve this issue “as a matter of urgency”.

What is the connection between child benefit and the state pension?

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, explains: “Child benefit is one benefit that carries National Insurance credits to help preserve parents’ state pension entitlement during time they spend out of work. 

“Not claiming it leaves gaps in people’s records, leading to lower state pensions as a result. It’s a real hidden horror of the system that more people need to know about.”

Anyone who claims child benefit can tick a box on the form to claim National Insurance (NI) credits for the years they aren't working. 

This will prevent their NI record having gaps in it. If they don’t claim child benefit, but do take time off work to raise their family, they won’t receive NI credits and they may not receive the full state pension. 

The full new state pension is worth £221.20 a week, or £11,502 a year. To get the full amount, pensioners need to have 35 years’ qualifying contributions - either via contributions made by working or NI credits.

How does child benefit work?

Child benefit is paid to families bringing up a child who is under 16, or who is under 20 if they stay in approved education or training.

It’s worth £25.60 a week for an eldest or only child, and £16.95 per additional child.

The benefit is not paid to high earners. A tax charge called the high income child benefit charge kicks in when a parent earns £60,000 a year or more, reducing the amount of child benefit paid, and removing the payment entirely when the parent earns more than £80,000.

The income thresholds were previously £50,000 and £60,000 respectively, but were increased on 6 April.

I earn too much and can’t keep the child benefit - so how can I receive the NI credits? 

It is possible to claim the NI credits but not the child benefit, but many families seem unaware of this option, according to Webb.

Charlene Young, pensions and savings expert at AJ Bell, comments: “Families can claim child benefit but elect not to receive the money if they’ve hit the high-income threshold at which it needs to be paid back. This ensures they still get National Insurance credits towards the state pension and other benefits.”

The government updated the system recently so that parents can tick a box on the child benefit form that says they want to claim the National Insurance credit without actually receiving the child benefit money. 

Alternatively, you can claim the money and pay it back via your self-assessment tax return.

What about NI credits for previous years?

The government is working on a system to help families claim back the National Insurance credits they missed out on previous years. 

From April 2026, parents will be able to apply for NI credits who could have claimed child benefit but did not do so. They will initially be able to claim all the way back to 2013, and then after that parents will be able to apply for credits going back up to six years.

But Webb is worried that parents won’t be aware of the new system: “Although the government has proposed a new way of crediting people in, we still lack important detail and there is a risk that these new credits will suffer from the same non take-up problems we see in the existing system.”

He adds that with an election interrupting the potential for legislation, it could be delayed.

Last year the Treasury said: “The government recognises concerns that some parents who have not claimed child benefit could miss out on their future entitlement to a full state pension. The government will address this issue to enable affected parents to receive a National Insurance credit retrospectively. Further detail on next steps will be available in due course”.