Raising a family
If you're planning to start a family, or already have children, this guide will take you through all you need to know about what tax benefits are available to you, paying for childcare, life insurance and investing in your child's future.
The cost of raising a child from birth to 21 is now estimated at £218,024 (1) - that's £10,382.09 a year or £865.17 a month. So if you're a parent, or parent-to-be, finding ways to make your money to work harder a high priority.
Budgeting for a baby
In most cases, despite getting maternity/paternity pay, one person's income will be significantly reduced after the baby arrives. You will need to re-address your finances and work out your monthly outgoings against your reduced monthly income. Once you have done this, then you can work out what you can afford to spend on doing up the nursery and other essential baby items.
There's a vast array of furniture, toys, and feeding, changing and travelling equipment marketed at new parents. If money's tight, though, talk to other parents about what items are really necessary and try to borrow from friends and family where possible.
Remember that all families with children under 16 are eligible to claim Child Benefit. The government introduced high income benefit charges to households with an adjusted net income over £50,000 on 7th January 2013.
Find out more about Child Benefit and the High Income Child Benefit charge at www.hmrc.gov.uk
Make the most of maternity/paternity pay
Some employers offer generous maternity packages and even the basic statutory maternity pay (SMP) will provide you with an income for up to 39 weeks. However, for some it will require a financial rethink.
If you've worked for your employer for 26 weeks and earn at least £97 a week, you're entitled to 90% of your average pay for the first six weeks and then a flat rate of either £136.78 a week or 90% of your average pay (if this is less) for 33 weeks. If you don't qualify for SMP, you might be able to claim Maternity Allowance, usually paid for 26 weeks. To qualify for the latter your earnings must be equal to the Maternity Allowance Threshold of £30 a week.
You can find out more about Maternity Allowances at www.gov.uk.
Currently, fathers-to-be who have worked for their employer for 26 weeks and earn £97 a week, are also entitled to statutory pay, called Ordinary Statutory Paternity Pay (OSPP). This is paid for up to two consecutive weeks, depending on how long you choose to take leave for. Fathers are also entitled to £136.78 a week (or 90% of your average pay if this is less).
Some employers have their own paternity leave arrangements, which are more generous than the statutory entitlement. It's best to check your employment contract to see which one is best for you and if you qualify for it.
If your baby was born on or after 3 April 2011 you may be able to take up to 26 weeks' Additional Paternity Leave on top of your two weeks' Ordinary Paternity Leave.
You can find out more about Paternity Leave at www.gov.uk.
Case Study
Peter and Vicki Johnstone
"We're raising four boys and money's tight"
Raising four boys on a budget
Peter and Vicki Johnstone from Leeds have four boys - Daniel, 13, Lucas, 10, Billy, 7, and Marcus, 2. They discuss the impact their ever-increasing family has had on their finances.
"When Daniel was seven months old, Vicki went back to work part-time while Daniel went to nursery. The costs were a shock. Essentially our income went down and our outgoings went up. As well as nursery fees, we spent a lot on equipment and bought a second car."
"The nursery costs increased with each child and with Marcus we opted for a childminder, which proved much less expensive and more flexible."
"The biggest expense has been extending the house twice and re-doing the garden to make it safer. We also need a people carrier now there are six of us."
"Food is another big expense with four boys! We try to cut costs by menu planning. As they get older, the cost of activities like music lessons, sports, trips and so on really mounts up."
"On the plus side, we now have so many hand-me-down clothes that by the time Marcus came along we bought virtually nothing."
"Our top tip is to do as much as possible for free or very little money. Use libraries, visit charity shops, holiday at home, always collect loyalty points, make your own Christmas cards and never turn down a hand-me-down!"
Paying for childcare
If you decide to go back to work after your maternity/paternity leave, you could face a hefty childcare bill. The average cost of 25 hours' childcare per week is £88, with many private nurseries charging more than £200 a week for full-time care. London nurseries charge the highest fees (up to £11,050 a year for 25 hours a week childcare and £22,100 for 50 hours). And the average live-in annual wage for a nanny is £20,429, excluding tax and National Insurance.
Working Tax Credit
Fortunately, many families are entitled to the childcare element of Working Tax Credit, which currently can provide £300. The tax credit is phased out for earnings between £40,000 and £60,000.
Childcare vouchers
Childcare vouchers can help reduce the cost of childcare. If your employer offers this, the amount you can save depends on when you joined the scheme. If you joined your employer's scheme before 5 April 2011 you can get up to £55 each week or £243 each month free of tax and NICs. If you joined your employer's scheme on or after 6 April 2011 you can still get up to £55 a week free of tax and NICs if your employment earnings are not more than the higher rate threshold.
If you are a higher or additional rate taxpayer the amount you get free of tax and NICs is reduced.
The amount for higher rate taxpayers is £28 each week or £124 a month and the amount for additional rate taxpayers is £22 a week or £97 each month. From 6 April 2013 the exempt amount for additional rate taxpayers will be £25 a week or £110 each month. Be aware that you can't claim Working Tax Credit for childcare paid for by childcare vouchers. Use the HMRC vouchers and credits to check the best route for you.
More help is available for older children, with the State now paying for up to 15 hours a week of nursery education for three and four year – olds during term time.
You can find out more at www.payingforchildcare.org.uk.
You can find out more about children's savings at www.gov.uk.
Funding your child's education
Since 2012, students have to pay up to £9,000 a year in university tuition fees on top of living costs, depending on their domicile within the UK. If you want to help them out, or you want to send your children to fee-paying schools, plan well in advance for investments you can rely on in the long term.
Make sure you use up your ISA limits to invest as much as possible tax efficiently: each parent can save £11,520 in ISAs this tax year. You might also consider savings plans that can be put into trust for your children, earmarked for their education. Another option is to fund your child's education via your pension - you can withdraw 25% of your fund as a tax-free lump sum when you reach 55.
It's worth knowing that any gifts you make to your children for education or training will be exempt from inheritance tax.
Some statutory grants are available for students whose household income is below £50,020. And most students rely on student loans, which they don't need to start repaying until they're earning more than £15,000 a year.
You can find out more about student finance at www.gov.uk.
Investment options
If you want to give your child a head start, for example to provide a deposit on their first home, you might want to start saving while they're young.
You can set up a savings account in your child's name and fill in form R85 from HMRC to ensure they receive interest tax free assuming your child won't earn more than £8,105 in 2012-2013. This will be increased to £9,440 in 2013-2014. However if this interest exceeds £100 per annum then the whole amount will be taxed as the parent's. This limit is £100 per parent, per child.
Currently, you can pay into an existing tax-free Child Trust Fund (CTF) up to certain annual limits, but new CTFs can no longer be set up. Instead, the government has launched tax-free Junior ISAs. Unlike CTFs, there are no government contributions2.
Another tax-efficient use of your money is to set up a pension for your child. Under current tax rules you can pay in up to £2,880 a year and the government will add £720 (20%) in tax relief.
You can find out more about children's savings at www.gov.uk.
Protecting your family
If you're a parent, you should draw up a will designating a guardian for your child should you and your spouse die together. You can also use the will to set up a trust for your child, specifying what you want the money to be used for and at what age.
It's also a good idea to have life insurance to provide a lump sum if either parent dies while the children are still dependent.
Top tips
- Most new mothers can get 39 weeks' paid maternity leave.
- Working Tax Credit can cover over £12,000 a year of childcare costs.
- Childcare vouchers could save you £1,000 a year.
- You can invest tax-free for children in a child trust fund or new Junior ISA.
- When you become a parent it's important to make a will and review life insurance cover.
Laws and tax rules may change in the future. The information here is based on our understanding in January 2013. Your personal circumstances also have an impact on tax treatment.
