Childcare & 100%+ tax rate over £100k

[Childcare47]

I currently have one child in nursery. It’s expensive - £100 a day.

I earn over £100k. Between £100-125k I pay 60% tax (ie £10k take home), but I also lose tax-free childcare (ie £8k take home).

This is a 68% tax rate.

When my child turns two, under the proposed new ‘free hours’ system, I will be eligible for only 15 hours. The cost of losing the other 15 hours is £100 a week - £5,200 a year.

This will make my take home pay between £100-125k go down to £2,800.

This is an 89% tax rate.

I had hoped to have a second child. I suppose then I will be losing this £7,200 per child per year in childcare support - for two children at a time.

This will then leave me with a 117% tax rate between £100-125k. It will cost me £4,400 more in tax than I earn.

What behaviour is the government trying to incentivise among higher earners with this cliff edge?

I’d presumably be better off going down to four days a week, and reducing my salary by 20%?

I take a private jet to commute from Aberdeen to London each day.

You don’t even want to know my tax rate.

I agree that it does seem unfair. I'm only on a low salary, but I think the higher tax rate should kick in at a higher salary, perhaps 150/200k. I also don't think anyone should lose the tax free element (first 12kish). Many people are wealthy without earning anything, just through inheritance/property/family money etc and it seems disproportionate to take so much from those working to earn it as income.

On a serious note, you are somewhat right, cliff edges do encourage gaming of the system. I’d salary sacrifice over £100k probably, or reduce my hours.

Unless you are earning well over 125k, it is best to increase pension contributions or reduce hours so your salary falls under 100k. With just one school year between my children, we had both in nursery for a while and DH did this until youngest started school so we got the free hours and tax free childcare. Most people we know do this at that bracket, those earning over 125 usually suck it up as the salary increase is sufficient to justify

You won't generally get any sympathy on here unfortunately but I hear you, and you're right, it's desperately unfair. That kind of marginal rate is absurd.

All you can do is decide whether to push through in the hope of pay rises that take you out the other side of that bracket, or cut back your hours to go below it, which might harm your career.

If your child is in nursery now, they would not be able to access the full 30 hours when they turn two as only 15 hours for 2 year olds is being introduced in April 2024. This is not due to salary, the full 30’hours will not be available until Sept 2025.

However I believe funded hours are not available to those who earn over 100k.

Only 2 per cent of the UK's workers earn £100k. Only a small percentage of that small percentage have children.

They're not trying to incentivise anything. They're trying to up the tax take.

How you choose to handle the implications of this for your household is ip to you (reduce hours while you have small kids/ shove it all into pension to avoid tax/whatever)

Yes it's ridiculous

Pension contributions to take yourself down to £99,000 is the sensible option with pre-school kids.

The standard is that childcare costs are taxed.

Then in some situations people are eligible for tax free childcare.

Parents who don't earn more than 16 hours a week NMW are also not eligible for tax free childcare or the 30 hours if I remember correctly.

You're not being attacked by paying tax on your childcare when you're earning more than £100k. You just haven't got the eligibility for a scheme that's not designed for people in your situation. The median weekly salary in the UK is around £600 a week.

I agree there should be some tapering though rather than a cliff edge.

@tealandteal yes my child is in nursery - they won’t have turned two by April 2024. One of the sacrifices I had to make to keep this kind of job = back to work very early!

@prescribingmum seems slightly absurd that during what I’m assuming will be the highest earning years of my career, I will have to put most of the proceeds into a pension to avoid paying tax rates of over 100%.

Definitely increase your pension contributions if you can, to reduce your adjusted net income, until the expensive nursery days are behind you.

How long has this system been like this? Genuine question, I’m poor.

You’ve missed my point here - due to not being eligible for the scheme it’s costing me £29,400 to earn £25,000.

Therefore there is no point in earning the money.

I hear you OP. This was me, although I’m a little older now. For a number of reasons, tax being one, I quit my job for some time and became one of the highly skilled economically inactive stats. I’m now doing v part time work as a self employed person to maximise tax efficiency.

I believe in fair taxes and I was v happy to pay my share as a lefty voter. However there comes a point where it’s a disincentive to work those hours/at that salary and above.

But the hypothetical second child that would affect your marginal tax rate doesn't exist yet.
If you had a second child you'd be on maternity leave for a while which would reduce your income that year and you'd be off work so could save on childcare. The second child, when it needed childcare, which is at least a year away even if you're very fertile, would only overlap in childcare for a short time before the first one went to school, certainly less than a year if first child is now turning two.
So your hypothetical situation is very temporary and you could avoid it by putting off that second child by a few months.

This is why I can see an argument for a standardised rate of tax across everyone. High earners would automatically be paying more. I am totally happy to pay more tax, but I think that everyone should contribute.

I earn 70k and am returning to work next month after mat leave. I've reduced my hours to 90% and condensed them to 4 days as I'd only be earning an extra £40 a month after tax and an additional day in nursery. Not worth it for losing a day a week with my daughter.

This. This is what we do. We have three at nursery and we both manage our pension contributions to enable us to claim the funded hours. In our pensions at least the money is still ours we just won't access it as quickly. We are planning on reducing contributions substantially when they are school age.

It’s only while they are in childcare though, once they are at school you can cut the pension contributions

Would asking for a lower salary work , but bigger bonus?

I paid 25k a year in child care for one and I earned in the region of 60-80 a year ( commission based). I was left with £150 a week I think. We survived, she went to school, life moved on. This isn't forever and your pension pot must be healthy?

basic rate tax in the uk is 20%, higher is 40% and additional is 45%, to keep the same tax tax overall you’d have to have a tax rate above 20%, so a standard tax rate would penalise the lowest earners

15 universal hours is still just for 3/4 year olds. The 2 year old 15 hours will be for eligible ones only.

Don't make the mistake of calculating the free hours at face value I have my child in nursery (£75/day) for 4 days, so 40 hours. I assumed that, as I qualified for 30 hours, that the bill would drop by 75%. In reality, it dropped by about 25%, mainly due to fact that the hours aren't fully funded and the nursery recoups costs in the wrap around care. Likewise the tax free childcare is only for the 1st £10k, so is more like 10% in the southwest where nursery is about £20k per year

The government needs to start properly taxing unearned income and close loopholes. They also need to stop wasting money on things which benefit party donors - track and trace, government alert schemes, academies (they take 5% of school budgets for no discernable reason), take drug manufacturing in house - that would save the NHS billions. We're living surrounded by capitalist pirates and the salaried 'rich' are the mugs in this scenario

@InMySpareTime no I wouldn’t be able to take my child out of childcare while on maternity leave.

They would lose their place - and places are difficult to get locally.

I also can’t take a prolonged period off, due to the nature of the job.