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%?

And I'll also add it's rubbish everyone on here focuses on just taxable earnings in the 'you should be grateful' camp. Plenty of people I know get help from family and otherwise (like free childcare, paying for holidays, buying them a house, actual literal cash gifts, or even just massive unearned growth in property value) that help them have a better standard of life than their taxable wage would. Salary is not that important in driving inequality!

Do you mean you earn over £100K and you take home £2800 a month??

Childcare costs should be shared between both parents, not one taking the full hit.
also it is a period of time that doesn’t last forever so you do have to suck it up s bit. Kids only get more expensive anyway. Uni years are terrible!

I’m intrigued that so many people think a 89-117% tax rate on earnings is completely reasonable and nothing to take issue with.

Also on ‘did you not think of this before you had children’, does that apply only to people earning over £100k? Or should everyone be having their childcare support revoked?

@sashagabadon that my partner and I share the cost of the nursery fees is irrelevant - the relevant factor is the sum of money LOST as a result of earnings level.

We still end up several thousand pounds a year worse off due to the tax rate at this level, as a result of the cliff edge of loss of tax free childcare / free hours.

I agree, it's unfair to the people who contribute the most.

I would go the route of increasing the pension contributions if I were you. It will pay off someday or might give you the freedom to reduce contributions in the future if you ever need to.

The fact that posters are going on about childcare costs being shared between both parents demonstrates the complete lack of awareness. It’s not about childcare cost stripping out the entire wage - it just takes ONE parent to earn over the threshold for the funding to be removed. Once the loss of funding is taken into account, that parent is paying pretty much every penny earned over the 100k in tax (potentially more if you have 2 in preschool simultaneously like we did).

Who’s salary the childcare cost comes out of has absolutely no relevance here🤦‍♀️

No.

I mean that for the £25,000 I earn between £100-125k, I effectively receive £2,800 annually.

It should be £10,000 - but because of loss of tax free childcare and free hours, it goes down to £2,800.

An 89% effective tax rate.

No, her figures are per year and relate to £25k of a £125k salary. Of that £25k, the effective tax rate is 60% ie £15k - meaning she “gets” £10k pa of this.

Then she doesn’t get the £2k benefit for childcare, “reducing” it to £8k (it doesn’t actually reduce her take home, as it’s a top up she doesn’t get rather than a take home). But she has expressed it as a tax rate.

Then, if she doesn’t get the 15h free a week in term time (equating to 11h free a week year round), she is estimating the cost of that to her as £5200 pa. Take that away from £8k and that gives her the £2800 a year “for herself” out of the £25k a year between £100k and £125k.

Again, the lack of free hours aren’t affecting her take home, but do mean she is paying for something that she wouldn’t if earning under £100k.

From her OP:

”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. “

X post!

You need a better IFA there is no need to be paying tax of that magnitude if you wrap it up effectively.

@Doggymummar wrap what up effectively?

The only solution appears to be putting large sums into my pension.

“I’m intrigued that so many people think a 89-117% tax rate on earnings is completely reasonable and nothing to take issue with”

It’s not really a tax rate, though, apart from the loss of personal allowance. It’s a benefit that you aren’t eligible for.

I agree that the previous childcare vouchers were better than the current £2k contribution for higher earners.

I’m in similar situation OP, i.e. I’m definitely worse off if my income falls above 100k due to the TFC/free hours and 60% tax.

for now, im desperately trying to keep my taxable income under £100k. So far I’ve done

• Increased salary sacrifice pension contributions
• Cycle to work
• bought additional annual leave
• looking at electric vehicle salary sacrifice

its the free hours that tip it over the edge. Once DC2 starts school I’m thinking will just have to suck it up, and pay an extortionate tax rate on £100-£125k, it’s really frustrating though and makes no sense given that people pay a lower rate of tax on earnings over £125k plus!

Yes, and I believe for certain of the matters you need to do this at source (ie so it never hits your pay slip , rather than a contribution afterwards)

No not after expenses!

Say you earned 120k - of that 20k over 100k you would pay:

£4.8k in paying back the tax free allowance (40% on 12k)
£8k in regular tax (40% on 20k)

Then you would lose your childcare entitlements:
£2k in tax free
and your 30 free hours - e.g. I have two 3yos at nursery, it works out to be about 1 free day a week, this equates to £500 a month (£250 each), therefore £6k a year.

So of that extra 20k in earnings, I am actually £800 worse off!

Obviously the childcare is an expense, but it's being counted here because it is an expense that is a direct result of earning over 100k. It is absolutely fine for the government or society to decide that someone of that income level is not eligible for a benefit, I get that. But the people affected are also entitled to review if it makes sense for them.

Like in my example above, I can drop to 4 days a week and receive basically the same net pay! I think <2k a year difference. I know the income is good, and I don't think anyone is claiming it isn't. But would you really work an extra day for very little difference in income?

I have this same problem as OP. Basic salary is £100,700 but I also recieve 15% bonus and some shares too and generally looking at about £130K gross (obviously it differs a bit as bonus % can go up or down a little, and share prices vary at the time of vesting).

I already put 12% in salary sacrifice pension as standard. My youngest will be 3 next year and I plan to salary sacrifice entire bonus and most of shares to get me under £100K. It's such a shame as I would have happily paid 40% tax on it (and taken the money and spent it, thus generating more economic value in the economy!), but the loss of childcare hours plus the loss of personal allowance means the marginal rate paid on anything above £100K is just utterly ridiculous. Putting it into the pension means I get to keep more of it in the long run.

Hadn't even thought of doing some holiday buy and elec vehicle though so your post PP has sparked a bit of excitement! I have been tempted by an EV anyway and my company is introducing a scheme shortly, so i'm keen to see if this would help too!

“But would you really work an extra day for very little difference in income?”

Nope, I would (and did, but for other reasons as taxation was different then) drop a day a week if I couldn’t manage it with pension contributions.

@catsandkid take a look at unpaid parental leave as well, might help bring you down below the annual

Another great idea!

There are more posts on this thread complaining about how unsympathetic MNetters tend to be regarding the financial problems of the well-off than there are actual unsupportive posts.

When I was working and claiming housing and council tax benefit, the earnings taper and increased childcare costs meant I took home 5p for every extra £1 earned. So I paid a higher 'tax rate' than OP on an annual salary of £19k. There are massive disincentives to work at both ends of the earnings spectrum.

Are you really equating having children with buying a fancy car or house?

Do you not accept that people having children isn't just beneficial to society, but is actually essential to the future of humanity?

The cliff edge is crap. But it won’t be a decade of nursery fees, will it? A couple of years of 2 of them, if that. And your wage will probably then increase above the marginal trap.

Also

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%.

this doesn’t seem at all absurd to me. Sounds like a lovely ‘problem’ to have, TBH. The longer money is invested in a pension the greater the growth. You won’t get a better return on that money. It’s actually the best thing you could possibly do with it.

There are more posts on this thread complaining about how unsympathetic MNetters tend to be regarding the financial problems of the well-off than there are actual unsupportive posts.

Yes! I’ve noticed it a lot lately just generally on MN. An awful lot of tight diamond shoes and people complaining no one understands their pain and why can’t they complain about it when most posters are just saying, hey, sorry about your disappointing diamond-show experience but look on the bright side, huh?

It’s also the case for people who are not well off and they are told they shouldn’t have children if they can’t afford it.
Not that having children is beneficial to society etc….

why the difference?