Advice can help new parents avoid any unnecessary financial consequences of taking time off to have a baby
New parents have an awful lot to think about, with their financial planning often languishing at the bottom of the list. Advisers can add value by highlighting a few significant areas.
First and foremost, new parents must be made aware of the fact they will not be paying National Insurance contributions if they are not working, which can create a gap in their NI records.
Claiming child benefit credit can help them qualify for NI credits – the importance of this being they count towards their state pension.
A big challenge comes in being aware of, and completing, the required forms.
If the application is made as soon as or within three months of giving birth, then they will be able to claim full credit for the time they are not working. If the claim is made after three months, it cannot be backdated.
Parents who earn between £50,000 and £60,000 a year should be aware they will have to pay some of their child benefit back in the form of extra income tax.
Whichever member of the couple has the higher income will need to fill in a self-assessment tax return so that HM Revenue & Customs can calculate the amount of extra income tax they will need to pay. The amount paid back is equivalent to 1 per cent of their family’s child benefit for every £100 they earn over £50,000 per year.
So if a mother stayed at home to look after a baby while the father earned £51,000 per year, his income would be £1,000 over the limit.
This means the extra tax would be 10 per cent of the child benefit of £20.70 per week. Therefore, they would have to pay extra tax of £107.64 per year (£2.07 x 52).
If either partner earns more than £60,000 per year, they must
repay the entire child benefit as income tax.
The best way for a parent who earns over £60,000 to still be able to claim NI credits but not have to go through the process of filing a tax return is to choose not to receive the payment but still claim the credits.
One other issue that can result from a parent failing to claim, however much they earn, is that their child may not be automatically given an NI number when they are 16 and they might not get access to other allowances, such as the Guardian’s Allowance.
Beyond NI contributions
NI complications are not the only things new parents need to worry about.
They should also think about updating their protection policies to reflect the newest member of their family.
Many of these types of products, such as critical illness policies, can have a child cover option which will enable someone to claim if their child falls ill.
Sometimes child cover will come automatically included, while with other policies it will be an optional extra, which someone will have to actively choose to bolt on.
Making sure parents are aware of the nuances of their particular policy is crucial so they can claim if the worst happens.
They may want to consider wrapping the policy around a trust, especially if life cover is included, as this would enable the child to be named or classed as a beneficiary.
New parents may also want to think about the ways they can save for their child.
Many parents opt for a Junior Isa, although one potential issue here is that the child will gain control of the money once they turn 18.
If parents were to invest the maximum contribution of £4,260 a year into a stocks and shares Jisa for 18 years, the child might then have access to over £150,000.
If parents want to keep control, they could consider maximising their own Isa allowance before investing in a junior one.
Having a baby is incredibly stressful but some simple financial planning can help alleviate some of that pressure and make sure parents avoid any unintended consequences as a result of taking time off work.
Gordon Andrews is a tax and financial planning expert at Quilter