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%?

It’s more that everyone should have thought about childcare cost before having children, regardless of your income.

I know I did.
And I also knew that it cost me money to work for about 3 years. Aka we had less money coming in with me working full time than if I was staying at home…
But it was an investment for the future- I kept my job, I gained in experience and increased my wage. All worth it compare to having a 3 years break.
Which I’m sure you can relate to, seeing you decided to go back to work early.

Its the same here with 2~3 years of nursery fees….

@TheMarsian you said "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?"

I'm not making that differentiation. Are you?

The children of lower earners are not less important to society than the children of higher earners.

I think everyone suffers financially when they have children in nursery, your struggle is relative to your salary. I’d absolutely put more into a pension or drop a day a week to ease the pressure, but there’s no point being bitter about it with the ‘why should I put my money in my pension’, it’s just the way it is for a relatively short period of your career and many of us go through the same thing. Also those childcare costs are shared with your partner even if you do choose to ignore that bit.

I don’t earn anywhere near what you earn though, not even a quarter of it actually and I’m always surprised how high tax is for higher earners on these threads though, hardly seems worth the stress of those jobs really. So I do sympathise, I just think you need to make the best of it rather than being mad about it.

I can't really have much sympathy, though dh and I are higher earners now. When we had our first dc, there were no funded hours and no tax free childcare. I was earning about £20K a year. After paying for childcare expenses, my salary contribution to our household income was £100 a month. But I kept on working.

I now earn significantly more than I did 10 years ago. It was well worth the struggle. You sound accomplished and otherwise financially comfortable. Do whatever you need to do (keep working and pay, or drop down your hours/pay into pension and have less income). Either way you are already, and will be after nursery expenses end, in a much more secure position than most, and will be absolutely fine.

@TeaKitten well perversely the solution seems to be… work less.

Which rather defeats the point if the government is after more tax income / a higher skilled workforce!

@TheMarsian why the sneering comments about thinking about the cost of childcare before having children?

Thats irrelevant to the point isn’t it - which is that the government has created an earnings bracket in which workers actually end up financially worse off, due to the cliff-edge application of removal of free hours and tax free childcare.

Lobby the government. I am sure you have explained this situation to your friends and family, and I am sure none of these people have or will be voting Tory soon. Right? Right???

You're right, I don't think the government are going to do anything about it any time soon but as others have said if you're earning between about 100-125k you're better off managing that down wherever possible.

Options:

• lose a day a week (if possible)
• pension
• other benefits in kind that come out before tax etc like car scheme

“Which rather defeats the point if the government is after more tax income / a higher skilled workforce!”

Again, there will always be edge cases and you cutting down to 4 days a week for a couple of years is probably a small effect vs the overall take from the policies.

I paid a much higher marginal tax rate when I came off benefits (pre UC system) and went into full time work with full time childcare.

I was £9 pwk better off than on income support. So earning 25p per hour.

I had to wait until the first was in school before having DC2.

But it was a long term investment, I'm glad I did it and me and the DC are much better off fir it now.

One could also argue that consumerism i.e buying new cars etc is essential to our economy and hence our way of life.

The point is, we all know the financial implications of having children, not much point moaning about it afterwards.

Don't forget the £100k is not just salary, it also includes things like rental income and I think interest on investments. Obviously the raising interest rates and inflation will push more people in to this bracket.

Oncetheystartschool
I agree with you that there are tax issues in this specific income bracket.

Where I struggle is that someone earning more than £100k a year thinks that they should have more of their childcare expenses funded and if it isn't then they moan and act like it's super unfair and they're being penalised. They're not. Childcare is taxable as default.
The OP, and others in that situation, have the ability to structure their family finances as they wish in knowledge of the current less-than-perfect tax arrangements. That's up to them to do as they choose e.g. part time work, increased pension contributions for a few years. If they consider that preferable to paying the tax on their childcare then that is available to them.

Another way of thinking about it instead of "isn't it unfair that a wealthy person doesn't get to claim tax relief on their childcare" is to ask "what services should be cut and who should lose out in order to subsidize the childcare choices of someone earning more than 100k?"

@randomusername2020 completely ignoring single parents then? There was a thread recently where a single parent who had disabled children was at risk of losing her home if she went a penny over £100k because her income was around £4.5k a month and she needed to find nearly £3k childcare plus commuting costs and the rising bills. It's crippling and it disproportionately affects women.

Can’t you put more into your pension?

Disabled kids is a whole other level of childcare costs though if you can find any at all. The specialist play schemes round us cost in excess of £150 a day and that’s only for school hours

@randomusername2020 it's generally lower because of deductions like dental and health insurance, etc., but even without those having a job on that money generally requires a lot of childcare, living in an expensive area, and commuting costs. I've done the sums because it affects me and would literally be no worse off while my children are small if I lived in a housing association house on benefits and that's on a wage of nearly £5k a month take home.

no one else would accept working for no net pay , so I don't see why you should.

Actually some women do work for less than they have to pay in childcare fees, because of the long term benefits of staying in work.

Yep. I did.
And i worked through the primary years for very little too (before and after school club aren’t cheap either)

@LolaSmiles Another way of thinking about it instead of "isn't it unfair that a wealthy person doesn't get to claim tax relief on their childcare" is to ask "what services should be cut and who should lose out in order to subsidize the childcare choices of someone earning more than 100k?"

Look at the figures. OP’s talking about paying £15k in taxes in that bracket plus losing out on £8k of childcare subsidy. If she reduces her salary such that she gets the £8k, she stops paying the £15k. So by not allowing her to access childcare subsidy the public purse is worse off.

Working 4 days instead of 5 days is not a bad idea. My friend is on the same salary as you and have a 2 kids under 4yrs and this is what she does ! Working that extra day and Losing the tax free and 15 free hours just isn’t worth it. She much rather spend that day with her kids