The madness of the £100,000 childcare tax trap

[MidnightPatrol]

An interesting article in the FT today about the impact of the current and new childcare schemes on people earning £100,000, which is often mentioned here.

You can read it here

"From September, a parent in London with two children at nursery who passed £100,000 of earnings would need to earn more than £149,000 to compensate for the loss of childcare support from the state, according to new calculations by the Institute for Fiscal Studies — a pay rise of almost 50 per cent."

I'm not a high earner (well over 100k) but it does seem extremely daft that the cut off is so steep

Has anyone written to their MP regarding this?

@CaramelVanilla I agree that is a good idea.

I wonder if mumsnet should have a campaign around this / ask the Minister for education / early years on for webchat to discuss it.

It’s a real hindrance to women IMO:

• Women earning over the threshold who may feel they should cut down hours to claim
• Women married to partners earning over the threshold, who have to stop working due to not being able to claim

I think with the recent news about potential cuts to PIP etc, it would be tone deaf for MPs to campaign for families on such a high income

What’s madness is that people are cheering on benefit cuts for really vulnerable low income groups while well off people on huge salaries can still claim allowances. It’s not a race to the bottom but there is no consistency of attitude when it comes to this kind of thing.

For what it’s worth I agree that such a steep drop off of support is silly

If it wasn’t such a cliff edge perhaps people would be motivated to earn more, get promotions, work full time, not put so much in pension etc … and oh.. pay more tax as an implication

Is it fair? No. Should fixing it be a priority given the current state of public finances? Also no.

The aim of the childcare provision is to encourage all women to work more as the tax they then pay benefits society. It's especially valuable for women on high income. Someone on £100,000 or more is paying at least £31,000 in taxes and NI a year (not to mention employer contribution) which far outstrips the value of the cost of the childcare provision.

I am a single parent in this bracket and feel stifled by the £100k threshold - I am doing things like putting more in my pension and cutting back on my side hustles which means I am paying less in tax. If I wasn't able to put it in my pension, I would simply cut my hours, which would also result in me paying less tax. This result is detrimental to the wealth of the country as anything extra I'm earning I'd be contributing close to 50% in taxes all in.

The difference with benefit cuts to PIP is that the cuts are intended to encourage people to go back to work if they can (I'm not saying I agree with this BTW and I have some concerned as someone who has friends and family with severe disabilities). But FWIW PIP is not means tested at all, so theoretically someone earning over £100k could claim it.

They are not comparable situations or mutually exclusive.

I think there’s a good question about how much tax revenue it would raise if these cliff edges were removed, they might find the policies pay for themselves.

And - as the new childcare scheme makes things WORSE for those earning >£100,000, we are likely to see even more behaviour change by these earners to avoid this trap.

There are also many people without children who will be doing similar to avoid the 60% rate between £200-125k, who might also not otherwise if the rate wasn’t so high.

I think what people need to understand is that the cliff-edge is bad for all of us. It results in less tax receipts.

High-income parents (who are also high % tax payers) in this category usually choose to cut back their hours or sandbag income since the cliff-edge makes them worse off. It's in nobody's interest. That said even though I'm in this category I can see why it's not a priority and how it could be perceived to change it, but it would be financially better for our economy to do so.

Well exactly my point. I believe policy makers know it would be financially beneficial to remove them (it should quickly pay for itself), but it's the perception which would be problematic.

This was me a few years ago as a single mum. I paid extra into my pension to avoid but it does seem ridiculous especially because if I was earning that as a two person household I would pay less tax and get child benefit.

The problem is it’s always going to be considered ‘town deaf’ to help anyone above average - which is presumably why the £100,000 60% tax threshold hasn’t moved since 2010 either.

The problem is impact on productivity - and so tax revenue. And it’s these earners who pay the biggest chunk of UK tax revenue.

As of September, if you are a parent with two children at nursery you will potentially earn nothing between £100-149k according to this article. No extra take home pay at all. This is going to heavily incentivise the highest earners (and biggest tax payers) to reduce their incomes, move part time, and pay less tax.

That doesn’t help the rest of the UK either.

It’s even worse now, as a few years ago it was just 15 hours at 3 + tax free childcare.

Now it’s 30 hours from 9 months + tax free childcare.

So the overall value is greater, over a longer period, and is more likely to impact two children at once.

In general though, all of our tax policy is hopeless for single parents families.

If you earn that much you don’t need help with childcare. It will be a lifestyle beyond your means if you can’t. Downsize house or make savings elsewhere !

The facts are that people working and paying tax are getting shafted left right and centre. Tax thresholds have been frozen dragging more and more people into higher rate bands. Things like the childcare scheme add to the fact that working people are paying more and more.

Frankly if you’ve worked hard and pay your taxes, get up everyday, juggle family life you expect a certain standard of living.

We are at the point where those that pay have had enough and have nothing more to give. The current complex system of cut offs for certain ‘benefits’ isn’t working. Another good example is people who have worked all their lives and have the state pension, many are now worse off than those that didn’t as they all get lots of top up benefits etc. The system needs a complete overhaul imo.

Nursery years are short you have to take that hit of a few years not having any or much left over each month then they go to school and it gets better.

@Candyflosslatte did you read the article?

Due to removal of childcare hours and tax free childcare, from September a parent with two children in nursery will take home £0 extra on £149k, vs a parent earning £99k.

The cliff edge is absolutely stupid but I personally think it needs to be fixed by bringing in reductions at a lower salary point - so as to ease parents into the £100k absolute cut off sooner. (Rather than, say, starting the reduction at £100k and then increasing it as salaries go up from there).

For example, a 1% reduction in childcare allowance for every additional £500 earned over £50k helps ease into it much more gradually without increasing benefits for anyone over £100k.

Appreciate the allowance is in hours so that's trickier, but it could be adjusted to fit the principle.

The 100k cliff edge is ridiculous and needs to be reformed - get rid of the tapering of your PA and add a relevant % to the higher rate to compensate. It currently gives the wrong incentives and it adds unnecessary complexity (as does NI)

have a stepladder effect on the childcare costs - yes people on 100K plus can afford it but incentivising people into work for that short period where they need nursery is a societal and economic good

the government hamstrung themselves by restricting the taxes they could touch. I was hoping they would be a bit more innovative but they are same old

Agree. Let's keep benefits for the people who are worst off, not the ones on an extremely generous salary.

I think by your comment you haven't properly understood the premise of this thread or the implications.

Essentially the criticism of this policy is not to do with individuals not getting childcare hours, it's that society will be worse off because the cliff-edge drives behaviour which results in less taxes paid.

Why should people ‘take the hit’. I’ve got a better idea - extend the benefit to everyone regardless of earnings as we need those higher earners to keep earning and paying virtually all the tax that keeps this country running. People will reduce their hours and look at ways to mitigate this situation, because frankly they can and I really hope they do.

Well exactly. I'm just putting more in my pension as I legally can and turning down extra business as it's not worse it...

You are not understanding the impact of the cliff edge.

With two children, you earn £0 between £100-149k due to removal of childcare hours.

This incentivises people to do two things:

• work less. Can’t see a doctor? All of them with young kids work part time because of this.
• put money into pensions, reducing overall tax take

Financially, you’re better off working time, using less childcare, and maxing out your pension.

That doesn’t help the rest of the UK, whose benefits are funded by… you guessed it, these taxpayers who are opting to work less because of absurd anomalies in the tax system.