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 not a tax rate though OP as it is actually, optional to pay childcare fees - HMRC aren’t going to physically tax you at 89% if you stop using nursery.

I get it, I pay the 60% marginal rate between £100-£125k too. When my DC were small, all these ‘funded hours’, tax free childcare etc didn’t exist. If you wanted or needed them to go to nursery, because you work, you had to pay for it - all of it. And mine went to a nursery in Canary Wharf that was open 7am-6pm because I needed those hours, which was frighteningly expensive. I could afford it because I was well paid and it didn’t cross my mind that I should be getting any help with that, I just accepted most of my salary went on nursery fees for a few years.

It’s just that you earn well enough to not qualify for government support with your childcare costs. Which sucks, obviously and if you feel very strongly about it, you can (as others have said), drop to PT, increase your pension contributions.

Tax brackets at these middle salaries are so de-moralising, I faced the same predicament OP where after a promotion I was no better off. For this very reason I switched to a job at an international organisation so I no longer pay any income tax.

are you still living in the uk?

No, I'm British but moved to the Netherlands straight after uni. I had 2 normal tax paying jobs over here, but because the tax/benefit problem OP faces is the same over here, after having kids I took a job where I don't work more for less. There are plenty of these types of jobs in the UK too; it's world wide that these organisation salaries are tax free.

Your maths are off. Take home on 125k is £6400 or £76500 a year. Your childcare at £100 a day is £26000 per child. If you have two in childcare it’s £52000. Most people paying for two in childcare have little left over.

You forget to add that because you are working your not receiving universal credit of 20k ish, so are you being taxed that too.

Will you say you are being taxed £25k if you send your child to private school?

Do people really see it with this logic?

Well if you insist on using childcare that costs twice the average

There is no point coming on Mumsnet to point anything rational out. Many people in your position move to eg Dubai or Singapore for a few years for precisely this reason. Cheaper childcare, save on your tax rate, good private schools in the early years.

The UK is not a friendly place for people in your current position. It is for the very rich and those who need support. If you can get a better quality of life elsewhere and be better off in the long run, you should do what is best for your family.

It's not absurd at all. The highest earning point of your career is a great time to top up your pension as much as you can

That is the choice they make. It's exactly the same choice as people lower paid who just have one child in nursery - the only difference is the government wants them to work so gives them the tax back off the childcare in the hopes it makes them work so they eventually get more tax.

There inevitably exists a point at which the provision of benefits reaches its limit. Consider, for instance, a scenario in which the threshold for free child care is raised to £150,000. In such a case, individuals earning above this new threshold would likely express dissatisfaction with their disqualification from the benefit.

You currently enjoy a comfortable income, and it is reasonable to expect that your earning potential may increase over time. While it may require making sacrifices in the present, such as not qualifying for childcare benefits, your level of salary can bring about long-term rewards.

As your children grow older, you can reap the benefits of your financial stability. It has already been said you could increase your pension contributions, which can lead to a substantial retirement fund and you will be in a much better financial situation than most.

Incidentally, as a single woman without children, I have never qualified for any benefits. Given my profession as a nurse, my earning potential is relatively limited, and I will never reach the income level you enjoy.

Currently, I am fortunate enough to own my house outright, but if I were faced with the burden of paying rent, I honestly cannot fathom how I would manage to sustain myself on my current salary. Considering the soaring housing prices, purchasing a home on my single income would also be impossible now.

It is perplexing to me how individuals who earn significantly higher incomes can still express dissatisfaction with their circumstances.

@9outof10cats You are missing the point.

The impact of losing access to funded childcare creates a >100% rate of tax on almost a third of income.

Earning £99.9k I would end up with more more in my pocket each month, than if I was earning £140k. That is how significant the cliff edge of childcare support is.

Would you continue to work extra hours if it actually cost you money to go to work?

You are extremely fortunate to own your house outright - most families with young children have enormous mortgages as well as their childcare expenses.

I don't believe they are expressing dissatisfaction of their circumstances, rather highlighting a flaw in the system. It is factual, they are correct. At a certain tipping point, you cross into the bracket of getting less for more work. Of course, once out of childcare years etc it steadies out, but for a moment in time, some will get more for working a 4 day week than a 5, and that is indeed an odd and somewhat disappointing realization when it happens to you.

@RosettaTheGardenFairy more than a flaw in the system to create a >100% tax rate… exclusively for parents of preschoolers….!

I would be interested to see a study on how it impacts the behaviour of parents in this predicament. Not much point earning that extra £40k to give the entire sum to HMRC.

And that's why I made the choices I mentioned above, I just wasn't willing to take on all that extra work, responsibility etc in my previous role for what worked out at 20 quid a week. It was madness.

I am obviously older than you and bought my first property when house prices were lower, for that I am very grateful.

If reducing my hours were to affect my future career prospects then no, I would not drop my hours. Despite needing to work I also like being productive and that for me is enough to see the benefits of working, beyond the pay packet.

However, if I had children maybe I would think differently. In that case, getting to spend more time with my children would be more important to me than career prospects.

@Childcare47 I think it’s an accepted edge case. There aren’t going to be many parents of pre schoolers affected, as not many people in the scheme of things earn £100k+, not all of those are parents and many parents drop to 3-4 days a week in the baby years anyway (or up pension contributions, as you have been advised - which comes with tax benefits too). There just aren’t many people in your position and policy is for the needs of the many.

Gosh, do you? How fascinating! (Seriously!)

It is insane OP. I'm a lone parent with two small children and caught in this bracket. Mortgage alone, huge childcare costs of course as nobody to juggle with, so we could do with the money but I've had to put more in my pension and cut my hours. If you add in student loan as well the effective tax rate is 126%.

To make back the tens of thousands you lose by earning £1 extra over £100k you have to get a salary increase to over £160k, just to get the same takehome pay. Ultimately nobody is going to work for free, let alone work more hours to be poorer than they were before.

It's well documented how much this is damaging UK productivity, discouraging our most productive workers from working at full capacity, many in shortage areas.

Same effect as the ridiculous child benefit withdrawal at £50k, except more extreme as those people at least get to keep some of their additional earnings, rather than being charged to go to work!

Absolutely no incentive at all. It's been this same group of PAYE workers hammered for over a decade now while taxes on our lower and middle earners are some of the lowest in Europe and those who are actually wealthy pay a fraction of the overall percentage of earnings that employees do. It isn't sustainable.

I understand what you are saying but where there is a cap then there will always be people who end up just falling outside that bracket - you have to draw the line somewhere.

The alternative is to give every parent free care, but then other groups i.e. childless individuals, who may also be struggling financially, will feel aggrieved that they do not qualify for some kind of benefit as well.

You will never please everyone.

Ignore the nasty comments they're just jealous. i think the cliff edge is a bit harsh and one we are facing too (Btw you lose £2k in childcare tax not £8k).

My husband has just got a promotion is about to go into the bracket. We've spoken to his HR and agreed that for the next few years anything above 99.5k goes into his pension (it also sorts out the problem of his currently very poor pension). it means we have less to live off but thankfully we can pay our bills ok on this and we have some inheritance we have put aside for childcare bills

If this isn't a possibility then reducing your hours might help but depends else you're gonna have to just bite the bullet. it's a stupid cliff edge but it's the way the govt had decided to do it and they're not going to get much support for providing people with six figure salaries more help

Jeremy Hunt commissioned some research to find out why UK productivity was so low before his last budget and this was one of the main reasons cited for people cutting to part time hours: this extortionate effective tax rate at £100k-£125k and the slightly lower but still ridiculous one from £50k-£60k. So the Government know, they have been told, yet they have chosen to do nothing about it. Tbh it is disturbing enough that someone holding the position of Chancellor needed research to tell him this, but to then not fix it anyway... the mind boggles.

Also its worse than i thought as i think for the 1-3 year old ones you don't get ANY hours if earning over 100k.

It really annoyed me after all this was announced as i saw people posting on comments section - well if your partner earns over 100k then you can afford to stay home. like WTF?? 1. why should i stay home when i have worked hard to build my career? and 2. what about when its a lone parent?

People on low incomes are also at the mercy of unfair benefit systems. Years ago I worked with a single mother, anything she earned was removed from her benefit payment. She also had to pay her train fare to work plus work clothes. This left her with less a month than if she didn’t work. Plus the employer was paying NI contributions on her salary so the government were better off, but not her.

You’ve been given a good option to pay more into your pension, so at least you have a way around. Many on low incomes do not. Or reducing your days to 4 a week. Or you could find cheaper childcare.

Perhaps a fairer way of doing it would be that those on £100k plus get less childcare payments rather than none at all and it tapers with salary.