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%?

You need to sort out your pension contributions asap - it’s what everyone is doing in your pay bracket.

You can’t think of not getting a benefit designed for lower incomes as being taxed more. That’s not how it works. It’s like trying to factor in you don’t get UC!

Why don’t you want to put more into your pension, it’s a complete no-brainer, and you’ll probably get paid a similar amount per month, benefit from paying reduced tax, more in your pension, and you qualify for the tax free childcare (fyi the saving is capped at £2k a year).

I don’t understand your figures, is that monthly take home? Tax free childcare will only save you £166.67 a month.

Put anything over 100k into your pension until your child is in school.

The tax free childcare is still very useful for wraparound care and holiday clubs. We still use it to the max with school age kids.

Like a lot of others on this thread, we do some playing with hours and pension contributions to stay just under 100k

This is a temporary problem to a situation you’ll wind up better off from using the pension element. Everyone unless very rich or not earning at all has to make the same sacrifices with childcare and a shitty take home pay for a few years. Difference is I’m willing to bet your general lifestyle is a lot more comfortable than most.

You're choosing to see not being eligible for a government benefit as a tax though aren't you? Do you view other benefits the same way? I'm not eligible for child benefit. I don't view that as a tax on my earnings. Agree with other posters, you can put more into pensions if you want to play the system. Having children is an expense unfortunately.

But you legally have to take some time off (I think it's a couple of months), and for that time you could reduce days for the older child.
A couple of months maternity pay would reduce your income for that year.
The other parent could take parental leave too, and between you that might bridge the gap with two needing childcare before the first hits school nursery age.
By the time any of this happens we might well have a different government so there's no need to worry about a scenario that could well not play out.

Well thinking about it again we don't actually use it up to the max for our school age children but that's because we have both dropped a day to stay under 100k, in a catch 22 way, if we were full time we would come close to claiming the max.

I do hear you, OP, and I’m also a high earner though kids are out of childcare years. But your position is quite unusual and the government isn’t thinking of someone like you when it plans. As pp said, few people earn above 2%, not all of them have kids, many who do
will have a non working spouse or kids over childcare age, or only one child in childcare.

Put anything over 100k into a pension

Its 2 weeks and doesn't apply to self employed people.

…or they drop a day a week to be with children and bring earnings down that way.

Qith to would a nanny be more cost effective?

I think there's an assumption built into the system that £100k + earners with young DCs will have a SAHP at home to do the childcare.

Or they use nannies, who aren't eligible for childcare subsidies anyway.

There aren't many £100k+ jobs that you could fit into 8-6 nursery hours surely?

If you can't take the maternity leave can your DP take paternity leave? (Even if unpaid?)

With 2 DCs and I'm assuming 2 very high earners you are going to need domestic help other than just the nursery.

“But you legally have to take some time off (I think it's a couple of months), and for that time you could reduce days for the older child.
A couple of months maternity pay would reduce your income for that year.”

the issue is OP losing the place, not taking time off. SMP is 90% of salary for 6 weeks and OP May well work somewhere that tops it up for a bit too.

@Childcare47 I think your calcs are way off here.

£8k? The tax free childcare is capped at £2k annually.

and the 15 free hours when they come in, assuming they work as the current free hours do, are only relevant during term time (so ~75% of the year) and most nurseries still need to charge around 50% on these days. So that £5200 is more like £50 x 39 = £1950.

OP is assuming all extra childcare costs are coming off her top line, surely childcare is a shared cost between both parents?
That would change the maths.

I'm totally with you op.

From a UK economic perspective it is insanity. I have friends you work 3-4 days because they don't take home any more money for 5 days. These are in jobs the UK is desperate to fill.

I have friends turning down promotions, not taking job offers because it is not worth it and they'll never earn over 150k where things become normal again so they stay where they are.

You can't just 'put it all in pensions' although the annual allowance increase helps.

This is not complaining about the amount of tax paid by people earning over 100k. They likely need to pay more than they do, and I'm one of them.

From what I see in the jobs market, the 100k cliff edge negatively affects the UK in many invisible ways. Can't get a hospital appointment? I don't know a single consultant or GP, people in their 30s and early 40s, who works full time, because it costs them money. It is not that they pay more tax, working more hours leaves them with less cash in the bank than working fewer hours.

It is about an insane system of cliff edges, negative earnings, and someone earning 110k paying more tax per extra pound earned than someone earning 1m.

Lower salary and bigger bonus is the same total amount in tax terms. 🤷‍♀️

Sorry to jump on OP, but can anyone explain how it works with bonus? Say a £95k salary but also a non guaranteed bonus of varying amounts. What would happen if one had, say, a £7k bonus at the end of a year?

@Ubbee in my calculations tax-free childcare is £2k a year.

The £8k you refer to is my take home pay on £100-125k after the loss of tax-free childcare is accounted for.

My 15 hours calculation assumes 1 ‘free’ day a week, over the year (ie 10 hours a week), which is what it ends up being. This is £100 a day at my nursery.

Then you have earned £102k and will be taxed on it accordingly.

Also, the many people saying to OP it’s just temporary and is childcare years etc. seem to have overlooked the fact that the cliff edge of losing the £12.5k tax allowance at this salary is PERMANENT.

@InMySpareTime its irrelevant to the tax question that childcare cost is shared with a partner.

The loss of the benefit is caused by my income - we still lose the same sum.

Re: maternity pay, I get enhanced maternity pay so no my income wouldn’t drop.

And taking my child out of nursery for any days a week will mean I won’t have that place when I go back to work - and my nursery is running a very very long waiting list.

@Canarias

also - ‘it’s just temporary’. Well no - it could be a decade of an 89%-117% tax rate.

Im not sure people would be very happy to find themselves paying this tax rate at any other income level, so why would you at £100k?