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 don’t think people realise how much bigger a problem this will be as of September, with the new 30 hours from 9 months.

Losing the 15 hours plus tax free childcare for one child was annoying, but probably absorbable. Earn up to about £110k and you need to put extra in your pension to claim, became not worth taking avoidant action quite quickly.

With 30 hours from 9 months… most people with two children will be impacted, and the value suddenly skyrockets to ~£20,000 a year (or £49,000 pre-tax).

Thats a bit incentive to change your behaviour, work patterns etc.

This group tend to be employed people on payroll. There are lots of much wealthier people who hide a lot of their income and pay proportionately a lot less tax. This group we're discussing are the highest contributing segment of society in terms of proportion of their income they pay into the system. De-incentivising them from working as much as they could has a negative outcome for everyone.

Perhaps childcare should be tax deductible

It's true, we're in the position atm (I'm the high earner, DH is a part time TA)

It's almost impossible to find jobs at the 150k + end (apart from some niche industries) to make up that shortfall and most jobs are pitched at just under 100k p/a to get around this. Between this and and losing the personal tax allowance as you go over 100k, it makes me wonder what the point is sometimes. I did the calculations and earning 99k a year we wouldn't be that much worse off than we are today, in terms of net take home pay.

I know people will say 'with your wages you shouldn't get help etc' but when you divide mine by two people - i.e. if we were both working FT in similar roles, it's not that outlandish. It does piss me off that if we were 2 adults both earning just under 99k, we'd qualify.

Not only do those on more than £100K not get the free hours, but they also end up paying for when the nursery ramps up the prices to make up for the shortfall in government funding. It’s absolutely lose lose.
My eldest starts school in September so we’ll only have one at nursery from then on, but if this were not the case and we had two in nursery, then we would be cutting our hours and putting more in pensions. Who’s really winning then? Not the economy or society

Why can’t the benefits be universal? It’s like paying the entire restaurant bill and not being able to eat anything yourself

Yes! We are in this situation. It is killing us financially at the moment. Lots of our friends are moving / have moved abroad to eg Dubai.

I can’t access the article. How many families are impacted by this?

I don’t think someone on £100k needs help with childcare. However, neither does someone on £99k so it should be a sliding scale up there. To anyone who would say “but £100k doesn’t go that far when you consider X and Y” I used to think the same, having grown up fairly well off. However, now I’ve worked in disadvantaged areas and learned what actual poverty is (not being a middle class kid comparing myself to upper middle class kids at uni, for instance) I know how naive I really was.

Your last point about a household of two people earning £99k is a real issue. It’s similar to the child benefit threshold being based on one income - they said they were looking at changing that, but that was Hunt so not sure if it will still be looked at. If they do they should look at it for the £100k rule for childcare as well.

Totally agree OP. These cliff-edge cut-offs in tax create a huge disincentive to earn more.

When one combines with relatively generous benefits for low-paid, and then the child benefit and childcare and loss of personal allowance cut-offs, it is no wonder that UK productivity is low. It is such a shame that Labour were not brave enough to tackle this in the budget.

£100k after tax and student loan is just shy of £5k a month.

You can spend that on two nursery places in London / the South East.

In any case, it’s not about poverty - it’s about incentives created by the tax system (and fairness towards those paying vast amounts of tax).

The new childcare scheme heavily incentivises our highest earners to work less, and pay tens of thousands less in tax. It is not good policy.

We have this situation at the moment with 2 kids in childcare, it’s a pain (but great for our pensions!) it completely stifles ambition for the few years that the kids are in nursery as there’s just no incentive.

Oh DFOD. In London £100k is not going to make someone rich and why should someone earning 99k get a huge perk and someone earning 101k not. And heads up, those people are already paying an absolute fuckload of tax so how about we maybe stop biting the hand that feeds us constantly?

As has already been pointed out above, the savings that these people will make is to the tax coffers, by decreasing their hours or paying into their pension rather than their PAYE bill. The effect of the drop-off is that they can, and will, ensure that they do not lose out as a household, but rather that the tax man does. It's an issue for both national tax income and workforce productivity. And it also means that higher earning women are less likely to stay in full-time work which is an issue for sex equality which is already woeful at that level.

What's also mad about it is that a household with both parents earning £99k (so total income of £198k) still get childcare, but a sole parent earning £100k gets nothing.

It should be tapered so that once you go over a joint household threshold of both parents, it gets reduced. The cliff edge at £100k helps no-one.

It's also mental that the childcare is from the "start of term after the child turns 9 months". So a child that reaches this age in mid-April gets childcare from end April (i.e. start of the Spring term). But a child born a day later would get nothing until 5 months later at the start of the Autumn term.

So a completely random change in birth date means some families lose £000s in support. We're likely going to fall into this trap and it's completely bonkers. Why does the pre-school child care relate to school terms?

Not really. Before I split with my ex I was on £20-30k. He earnt over £100k so I lost entitlement to everything. For a while I managed to work without childcare costs but ended up having to stop work to care for disabled child. Ex had to support us. The kids were not his. We muddled on for a couple years before the stress broke us and we split. I am technically really poor now in terms of household income but in real terms I was much much worse off with a high earning partner. I was lucky enough he covered all the bills I only had to cover kid’s clothes and luxuries but what if he expected me to go half’s with him? What if he was financially abusive?

it’s fine to say you don’t need help when on that sort of money and I do agree but that’s only true if the woman has access to the money and frighteningly often women with partners on that sort of money don’t have access to it and because they can’t get help with childcare or even child benefits they really are fucked using all their income to pay childcare or just unable to work.

The difference between this and PIP is that they are publishing the actual amounts of money.
So you can decide if you think it’s fair or not.
Pip etc - god knows how much people are getting .

Guess it should be gradual then tapered for families between 90 and 100k

How do you know? You have no idea what each family earning £100k+ situation is. I am not a high earner but my husband is, living in a normal house in London, we are obviously going to be worse off than a family earning the same in a cheaper part of the country.

EXACTLY!

Exactly.

There will be loads of posters saying £100k isn’t a huge salary though

the problem is that the new government seems to be tinkering when it would be good for them to look at other countries and see how subsidised childcare works (or doesn’t)

For example, my sil in Germany pays very little for nursery as it is subsidised by the state she is in at source so she only pays for their lunch

I wouldn’t campaign on this as 100k is a high salary and I’m happy for people to be taxed accordingly. If there was a lesser gradient then I’d be subsidising your childcare on a meagre pension.
Let’s campaign for the tax threshold to be increased annually so it is over the state pension rate.

My DH and I both worked 3.5 days a week for the childcare years so we could get the 30 hours. We had one day with the children and half a day a week together. We also paid loads in to our pensions.

I am in this income bracket, luckily with slightly older children so less affected. But, my husband and I both max out our pension contributions. Anything over 100k goes in, which reduces the amount we are paying in tax. And will allow us to retire early, further reducing the amount of income tax we pay over our lifetime.
The cliff edge has incentivised us to look after ourselves. Pretty sure that is not what was intended.