Is it correct to tell a small child that Allah is above the heavens and we can't see him because it is one of the rewards we may receive if we have set our life correct with our worship to him, then Insha’Allah we will be rewarded with this.

It is important that we teach our children or anyone for that matter what is correct. Messenger of Allah (ﷺ) said that, “Each and every one of you are leaders, (rai’a means like a shepherd) each and everyone is accountable for his flock.” [1]

The right way of doing things is obviously to teach them the right things. Allah is above and kids understand that because it is in line with natural inclination (fitrah). Why we cannot see Allah is because it is the belief of the Muslims that we believe in the unseen. We believe that there are certain things which we just cannot see, Allah created it that way. The angels are there, but we cannot see them. Similarly Allah who is the creator of the angels and everything that exists, we are unable to see Him in this life but it is part of our reward to see Allah in the Akhira. Just teach children the correct ‘aqeedah. It is best that we give them the correct understanding from a very young age.

And Allah knows best.

Reference:

[1] Sahih Bukhari 6719, Sahih Muslim 1829