Contractors, as a parent, is it time you re-registered for Child Benefit?

Following new chancellor Rachel Reeves saying she will not make an "unfunded" pledge to lift the two-child benefit cap, we’re advising some contractors who previously received the benefit to consider re-registering, writes Richard Grant, senior manager at contractor accountancy firm Chart Accountancy.  

Child benefit: background

Child benefit is a monthly payment made to parents or guardians of children under age 16, or under 20 if they remain in approved education or training.

This benefit is intended to help with the costs of raising children and is a crucial support mechanism for many families.

Prior to a threshold increase, families where the highest earner had an income above £50,000 were subject to the High-Income Child Benefit Charge (HICBC), effectively reducing or eliminating the benefit for higher earners.

The HICBC is collected by HMRC through Self-Assessment.

But on April 6th 2024, the child benefit charge threshold increased to £60,000. This change means that if you earn up to £60,000 a year, you can now retain the child benefit in full. This is a significant change, as before April 6th 2024, contractors earning income of £60,000 and above had their child benefit clawed back entirely.

What does the child benefit charge threshold increase mean?

1. Financial relief for middle-income families

Also on April 6th 2024, the so-called ‘upper threshold’ of child benefit was raised to £80,000, and this will provide significant financial relief for many middle-income families.

Under the previous threshold, families with earnings slightly above £60,000 faced a steep reduction in their benefits, often leading to a marginal tax rate that could discourage claiming the benefit.

But the new threshold allows families earning up to £80,000 to retain more of their child benefit.

2. Reduction in administrative burden

The increase in the threshold will also reduce the administrative burden on both families and HMRC.

Previously, families earning between £60,000 and £80,000 had to navigate the complexities of the HICBC, often leading to confusion and potential errors in tax returns.

With fewer families falling within this range, the administrative process will become simpler, leading to fewer errors and less time spent on compliance.

Thanks to the upper threshold – the level at which the benefit is clawed back – being increased from £60,000 to £80,000, those earning between £60,000 and £80,000 will retain some of the child benefit.

The thresholds are based on your adjusted net income after your pension contributions have been deducted. Therefore, depending on the level of your salary, you could consider increasing your private pension contributions to lower or even eliminate the HICBC.

However, despite the increase to the threshold, the concern remains over the fact that HICBC is based on the income of the highest earner in a household -- rather than the income of the whole household. That’s a criterion of the child benefit system which, like the two-child cap, Reeves could come under pressure to change.

3. Encouragement for workforce participation

By easing the financial penalties associated with earning just over £60,000, the new threshold encourages greater workforce participation.

Families may be more willing to take on additional work, pursue promotions, or increase their working hours without the fear of losing a substantial portion of their child benefit.

This could lead to higher productivity and economic growth, as individuals feel more incentivised to progress in their careers.

Our child benefit recommendation

In light of the above changes, if you or your partner have previously stopped claiming for child benefit, and your estimated income since April 6th 2024 is below £80,000 per annum, we recommend you consider re-registering for child benefit.

The charge is tapered so if you, or your partner, earn between £60,000 and £80,000 it may still be worth your while financially to claim.

If you expect to be earning under £60,000 you can now fully benefit from the financial support without repayment obligations. Once you earn above £60,000 you’ll be charged 1% of your child benefit for every £200 of income that exceeds £60,000. If your income exceeds £80,000, the charge is equal to the amount of the child benefit payment. Ask a trusted accountant to crunch the numbers if you’re unsure.

Restart child benefit as a contractor...

But if you’re already across the numbers yourself, you can restart your child benefit payments by either contacting the Child Benefit Office through their phone number, 0300 200 3100 or fill in an online form.