Helping families manage the cost of raising children in the UK

A recent BBC article about childcare deserts prompted me to write about this topic. It is one that comes up often for my clients, either as future parents, parents themselves or as grandparents.

Carefully considering how money is earned, how pension contributions should be allocated and how gifted money can be used is well worth the effort.

This is the first article in a series about how parents, caregivers and family members can navigate the costs of raising children in the UK.

High Income Child Benefit Charge

Since its inception in 2013 the charge claims back child benefit. Until April 6th, 2024, the child benefit charge was levied when the highest-income parent in the household’s adjusted net income exceeds £50,000, until it reached £60,000, when the child benefit had been charged back in full.

From April 6th, 2024, the child benefit threshold changed, and the band widened. The claw back starts at £60,000 until adjusted net income reaches £80,000. According to the IFS, this change of threshold means 22% of families are affected by the high-income child benefit charge, rather than the 30% under the previous thresholds.

Child benefit for the 2024/25 tax year is worth £26.05 per week for the eldest child, and £17.25 per week for each subsequent child. For a family with two eligible children that is £2,251.60 annually, or for a family with three eligible children, £3,096.60.

Now between £60,000 and £80,000, the charge is tapered — 1% of the Child Benefit amount is repaid for every £200 of income above £60,000.

The equivalent marginal income tax rate therefor is 51.2% for the higher earner with two children or 55.5% if you have three children.  This doesn’t consider national insurance contributions or any student loan repayments which drive the marginal rate figure ever higher.

The charge must be paid through the self-assessment tax system, even if the parent normally does not file a tax return, which would be the case for most employed people is in this tax bracket. So not only a cost, but also an administrative burden.

Some families choose to opt out of receiving Child Benefit payments to avoid the charge, though they should still register for Child Benefit to protect National Insurance credits, if one of the parents are not working.

Child benefit is claimable until a child turns 16, or up to 20 if they are in approved education, (A‑levels or NVQs), but not if they are at University or undertaking BTECs. You need to notify the child benefit office once your child is no longer eligible.

How to mitigate the charge

Dividends typically make up most of a company director’s pay. Directors can choose to delay dividend payments to a future tax year, take a director’s loan, or allocate shares to their partner/spouse if they are a lower earner. This should be done in conversation with their accountant and can help mitigate the tax charge.

Employees can increase their workplace pension contributions or can make contributions to a private pension. If done via salary sacrifice this is an immediate reduction in adjusted net income. If done through a relief at source scheme, then the gross contribution reduces your adjusted net income. To get the full benefit of a relief at source pension contribution you need to claim higher rate tax relief from HMRC.

Gift aid contributions need to be counted too, including the clothes donated to a local charity shop, or donations to a colleague’s charity run. These all reduce your adjusted net income, but you need to keep a record of these donations.

Giving up a rental property

The changes to rental property taxation have made rental properties far less tax efficient. It can have a knock-on effect too where it comes to adjusted net income. Mortgage deductions for a personal owned rental property are now offered at the 20% rate, but the full rental income (non-financing costs) is added to your adjusted net income — sending many middle earners with children into stratospheric tax bands.

You may be an accidental landlord; each adult owned their own flat then bought one jointly when they got together, and one kept their own home. Sounds sensible initially, but depending on your financial circumstances can be much more of a financial burden than a benefit.

Grandparents and other family members

For those who are not directly affected, you can still help. You can politely encourage your loved ones to take advice. You can also give money which could be allocated towards pension contributions. Pension contributions can be paid by third parties or can be gifted directly and then paid in by the individual. This needs to be done in accordance with rules on pension contributions detailed below.

More to come

The number of conversations I have on this topic with clients and prospective clients tells me there is plenty of interest in this area, but getting the relevant information is not always easy. Expect more in this series including how to manage tax-free childcare, free childcare hours, and Junior ISAs amongst other topics.

Notes

This article is for information purposes only and shall not be deemed to be, or constitute advice.  While we believe this interpretation to be correct, it cannot be guaranteed that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Thresholds, percentage rates and tax legislation may change in Finance Acts and bases of, and reliefs from, taxation are subject to change and their value depends on an individual’s personal circumstances.

* The annual allowance for 2025/26 is £60,000. Employee pension contributions are also limited to relevant UK earnings.

* A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

* Workplace Pensions are regulated by The Pensions Regulator.