Managing your money with children - Part 1

Having and raising children is one of the biggest and most rewarding challenges you can face in life. Children shift your focus from concern for yourself to concern for the care and development of your new family member(s). Nothing can prepare you for the range and depth of emotions you will face when becoming a parent.

• From the never-ending, sleep-deprived exhaustion when they’re very young, to the
  less frequent exhaustion of waiting up all night for them to come home as teenagers!
• The sheer amazement at having this new person in your life and the excitement
  at every new skill they develop, to the anxiety you feel about their safety as they take their first steps.
• And, the immense frustration at the mess they make (and how they talk to you) when they reach their teenage years, to the pride you have about their progress in school, other activities, and at what they achieve in the world of work later on.

What's in this guide?

This guide aims to explain how you can reduce the stress of managing your money, allowing, you more time to spend with your children and enjoying each step of the journey. 

The guide covers:

• The cost of raising a child
• How to find out what you're entitled to
• How to avoid child benefit tax traps
• How to control your spending

What's the cost of raising a child?

According to insurer LV, the average cost of raising a child from birth to 18 in the UK is £223,000. This includes housing and childcare costs. That's around £12,400 a year, or £1030 a month.

Make sure you know what you're entitled to

There’s a vast array of support available to help with caring for your children. The benefits system is extremely complex, so we can only outline the key benefits in this guide. Details can vary from year to year so check the current details from a more complete list of the help available to parents by following this link and check what you’re personally entitled to by using the Better Off Calculator.

The benefits available to help you support your children could include:

Maternity leave and pay for mothers

You’re entitled to a year of Statutory Maternity Leave, regardless of how long you’ve been in your job. However, your rights upon return to work may be slightly reduced if you take more than 6 months off. 

More details on the amounts payable and the rules (both of which can change from time to time) can be found here. Some employers pay more than the statutory minimum, paying amounts that are more in line with your normal wage for a longer period of time.

Check your employment contract and ask your employer to confirm your entitlement. They are obliged to make the payments to you. And be sure to provide sufficient warning ahead of your maternity leave – at least 15 weeks before your expected due date.

Paternity leave for partners

If you’ve been in your job for 26 weeks by the time your partner is 15 weeks away from their due date and you earn more than a threshold amount, you may qualify for paternity leave. Current rules and rates can be found here. But, as with maternity pay, some employers offer better terms. So, check your contract and speak to your employer.

Shared parental leave and pay

This option could allow both you and your partner to take a reasonable amount of time off (at different times) after the birth or adoption of a child, to share the time off to care for your new addition. Fathers are still entitled to two weeks of paid paternity leave and mothers must still take the initial two weeks after birth.

But, they can then cut their maternity leave short and exchange it for shared parental leave. In deciding whether shared parental leave is the right option for you, compare the amounts of your prospective shared parental pay (for both you and your partner) to what you might under a maternity or adoption leave pay arrangement.

The statutory minimums might be a lot lower with a Shared Parental Pay arrangement for the first 6 weeks, and top-up payments with some employers may be lower too. Check your entitlements using the government’s calculator which also looks at paternity and maternity leave, to give you a good overview of your options. Current details can be found here.

Adoption leave and pay

The rules for adoption leave and pay are similar to those for maternity pay. More details here.

Sure start maternity grant

This grant is a one-off payment of £500 to help with the costs of a new child – and is usually only payable if you have no other children aged under 16. You must claim it in the period from 11 weeks before a baby is due until three months after the birth (or three months after the adoption, residence or parental order if you’ll be responsible for a child under 12 months old). The grant is only available to those on a ‘qualifying benefit’ when the claim is made.
Find out more here.

Child benefit

You may be able to claim this valuable benefit if:

• You're responsible for a child under the age of 16, or
• Your 'young person' is still in education (A levels, GCSEs or NVQ/SVQs)

Child Benefit can continue after your young person turns 19, provided they were enrolled on their course before age 19. And the benefit stops at age 20, or when they finish their course if earlier.

The rates of child benefit and rules on eligibility can be found here. 

You will normally get a claim pack when your baby is born, or you can call the Child Benefit Office on 0300 200 3100, or follow this link. 

Free childcare for preschool children

There are many different government-funded schemes offering free childcare for children aged four and under across the UK. Each scheme has its own rules, so check what’s available and right for you here.

Free childcare is available in addition to other help with childcare costs – either through working tax credits, universal credit, tax-free childcare or childcare vouchers.

Child tax credit

Child Tax Credit (CTC) may be available if you’re responsible for a child under 16, or for a young person under 20 in certain types of education or training, and you are already receiving Working Tax Credit. The amount of your CTC will depend on your household’s income. 

Further details and notes on how to apply are available here.

Working tax credits - childcare element

If you meet the conditions for Working Tax Credit you may also be entitled to help with childcare costs under that benefit. The amount you get depends on your income, with details of maximum amounts detailed here. 

The childcare element of Working Tax Credits is normally only payable where the parent works 16 hours or more, or (if there are two adults) both work 16 hours or more. You could, in theory, use childcare vouchers at the same time as tax credits, but most people save more money using the Working Tax Credit childcare element alone.

However, you can get up to 30 hours per week of free childcare at the same time as claiming tax credits.

Universal credit roll-out

If you already receive tax credits you may be able to add the childcare element to your claim. However, tax credits are being replaced by Universal Credit across the UK and if you need to make a new claim you’ll need to check if that should be for Universal Credit. Find out more about Universal Credit and the benefits it’s replacing here

Tax-free childcare & childcare vouchers

Both tax-free childcare and childcare vouchers aim to help you with childcare costs. You can only use one or other of these schemes – so you can’t use tax-free childcare if you are receiving Universal Credit or tax credits. Childcare vouchers were provided by employers through a salary sacrifice scheme – allowing you to avoid paying National Insurance and income tax on your child care costs.

They’ve not been available to new applicants since October 2018, but you can continue receiving vouchers if you joined up before that date and stay with the same employer.

With tax-free childcare, eligible parents open a childcare account which is topped up by the
Government (up to £2000 per year per child) to cover 20% of childcare costs. To work out how much you could save on childcare costs and to compare childcare vouchers (if you’re already entitled to them) with tax-free childcare, tax credits and Universal Credit, use this online calculator from the Government.

What’s next?

As mentioned, there is a vast array of support available to help parents pay for the care their children need. But the benefits system is extremely complex and constantly evolving. So, if you feel that you’d like some personal help in navigating this information minefield, talk to someone at a Citizens Advice Bureaux or one of the other agencies listed here and make sure you get the financial help that you’re entitled to.

Avoid the child benefit tax and pension traps

If you or your partner earn more than £60,000 per year, your child benefit will start to be taxed away – and will be completely taxed away if either of your incomes exceed £80,000.

The result depends on how many children you support – but it could be an effective tax rate (on your income between £60,000 and £80,000) of somewhere between 50% and 75%! 

You may be able to reduce this tax with some simple financial planning. So, if you think this issue could  apply to you, seek good quality financial advice.

Warning

Not registering for child benefit (if one of you earns more than £60,000) may be a mistake if you look after your children when they’re under the age of 12, rather than working. This is because claiming child benefit triggers accrual of valuable state pension credits while you’re not earning.

You can register for child benefit (to secure your state pension accrual) whilst choosing not to receive the benefit payments (to avoid the need to pay a tax charge)!

You cannot, currently, backdate child benefit registration more than three months. So, if you’ve only just become aware of the issue, unfortunately you’ll not be able to accrue state pension credits for child caring more than three months previously. So, make sure you do the right thing for your  circumstances. If you need more help or information, go to www.gov.uk/child-benefit or phone the Child Benefit Helpline on 0300 200 3100.

Control your spending

We all know it’s important to keep our spending under control – but it’s essential once you have more mouths to feed. There are plenty of websites and TV programmes offering ideas for saving money on the things you buy – from baby walkers to school clothes and holidays. But remember… controlling your spending is really about two things:

• Getting great value on the things you must buy. That often includes avoiding expensive brands and buying second hand where it's an option and makes sense.
• Avoiding spending on things you don't need. Putting a few days of 'thinking time' between your ideas for new discretionary purchases and going ahead with them, will help with that. It's worth remembering that just £3 a day of savings (the price of a cup of coffee) can see you put aside more than £1,000 for emergencies each year.

You’ll find more ideas on spending control and debt repayment in Season one of our Money Insights videos available here.

And it’s worth seeing just how quickly you could save money by cutting out wasteful spending with this ‘cash finder’ tool.

Next steps

In our next blog on this subject we’ll look at housing, insurance and saving aspects of managing your money with children.