Life changes dramatically when a new baby arrives in the family. Quite apart from the shift in family dynamics due to the additional, demanding family member, it could mean one parent leaving work either on temporary leave or permanently to become a stay at home parent.
Changing your working situation means changes in your tax situation, so it’s worth considering how those changes might affect you and what other things you could do to prepare.
Are You Due a Tax Rebate?
If you’re leaving permanent work part way through the financial year and have been paying tax on a PAYE basis, you may be due a refund on the tax you’ve paid so far. You have the option of waiting until the ends of the financial year when HRMC will eventually get round to calculating whether you paid too much tax and issue a refund if it’s due.
You can also claim a refund part way through the tax year if you’ve left employment by completing a P50 form which you can do online. Providing the details you supply match those held by HRMC you shouldn’t need to do anything else. If there is any discrepancy you may be asked to send in parts 2 and 3 of your P45.
Claiming Child Tax Credit
Child tax credit can be a big help with meeting all the additional bills that a new baby introduces. How much you can claim depends on individual circumstances and your new household income, so here’s a rough guide assuming you don’t have childcare costs:
- With one child the household income limit is £25,000
- With two children household income rises to £35,000
- And with three children it’s £40,000
For those with an annual income of £16,105 or less, you can claim the maximum of every child tax credit you’re qualified for. Income above that threshold reduces the amount of child tax credit by 41p for every £1 earned above the threshold.
There are also certain changes in income that you’re obliged to tell HMRC about. For instance, should household income rise by more than £2,500, you must inform HMRC immediately or risk having been overpaid when reassessment for the following year rolls round. Any overpayment by the tax office must be repaid in full, and can affect any other benefits so it’s not worth delaying.
Changes to child tax credits came into effect in April 2017, effectively stating that support is now limited to the first two children (unless you have a multiple birth), and the family element is removed. This doesn’t affect those who already claim for more children under the old rules.
Any reduction in household income can put a strain on family budgeting, especially when it’s accompanied by the natural higher expenditure of a baby.
Keeping a tight rein on income and expenditure can help. You could, for instance, try treating the household expenses like a small business:
- Keep hold of receipts until you’ve had chance to note them down in a budgeting spreadsheet or notebook.
- Make it a regular habit to balance your bank statements against your income/expenses notes.
- Know where you’re spending most and look for ways to trim costs, in the same way business owners keep control of cash flow.
Cutting Your Tax Bill
There are legal ways of avoiding paying too much tax. If you haven’t already, you could consider:
- Putting savings into the non-taxpaying partner’s name.
- Get tax relief by starting a pension. It’s possible to put up to £3,600 into a stakeholder pension which would give you some tax relief meaning the actual cost would be £2,800.
Having a baby is a thrilling experience that brings huge change into your life. A little planning and forward thinking can take a lot of the financial pain out of parenthood.