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."

the tax bands need to be increased

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 !

🙄

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).

exactly

I’d be subsidising your childcare on a meagre pension.

😆

Higher earners also lose out because their nursery fees are artificially inflated to cross-subsidise the "free hours" of those entitled to the 30 hours. So you're not only not entitled to the funded hours but you also pay more to make up for the shortfall in funding for the hours of other children. It's one of the reasons why we chose a nursery that doesn't offer the full 30 hours. It's cheaper for us than an equivalent one offering the hours would be.

Is it really a steep drop off though? Surely people are aware that they are approaching earning £100k and can plan accordingly? Nobody is on £20k one day, and £100k the next. It took me years to build up to that, I certainly wasn't caught by surprise.

Also, there are options for additional pension contributions to minimise the impact as I understand it?

Exactly. It's not about wanting a handout. It's about what working is and isn't worth.

I'm a doctor. Full time I'd tip just over the 100k threshold. Also my 2 kids would be in nursery full time. I'd lose their 1140 free hours, which at £60 a day means I'd lose 13,680 and tax free childcare, which is worth 4,000 a year.

So I work part time, pay less to nursery and actually get to spend more time with my kids. And at the end of the month my finances are in better shape than if I worked full time.

Absolutely!

My closest friend and her husband are Dentists. Every dentist in the practice works part time because the tax incentives are just not worth it.

I'm not sure people understand that working more can actually cost (in some cases a lot more) money for people on or near the threshold.

For many, it's an easy choice - work less, see your kids more, more money.

I have a friend who works a 4 day week but still has her kids in nursery 5 days - she gets a day off to herself and is thousands of pounds better off than if she worked full-time! Nice for her but it shouldn't work that way.

Surely (most of) these job's don't just disappear though. If, taking the above person as an example ,if all doctors started working 3.5 days a week, you would just need 40% more doctors - all of whom are earning a good wage - this may actually be better for society compared to having fewer being paid more. (Obviously assuming there are enough people to fill those possible positions - which is obviously not the case in some situations, but would be in others.)

Also lots of people are talking about putting into pensions rather than take it as salary - but this will be taxed in the long term too.

My DH went just over 100k a couple of years ago so we lost all benefits, including the 30 free hours of childcare. After our second baby, we couldn’t afford for me to go back to work. The cut off it too steep, it was a 3k pay rise and we were worse off for it! We are lucky he earns what he does but it seems it’s a nonsense policy.

Where would you cut / reduce the support?

It's not the tax that matters, it's the double whammy of loss of entitlement to tax-free childcare and 30 free hours that really matters.

At 100k you:

• lose your personal allowance.
• lose tax-free childcare.
• lose entitlement to 30 funded hours.

While losing your personal allowance leads to a 60% marginal tax rate, it's really the second two which lead to a parent earning £101k being thousands of pounds worse off than a parent earning £99k.

It's really a very stupid system.

Let me run my sums a second… no. It isn’t my lifestyle I can’t afford. It is the nursery / pre-school fees. We subsidise the majority and pay excessive fees others aren’t subjected to. It is unsustainable in the longer term but thankfully coming to an end for us so we can live again.

Is it really a steep drop off?

You might lose £20,000 of childcare benefits as of September, with two children, if you earn a penny over £100,000.

That means you lose money vs earning £99k, until you earn £149k (as the example in the article).

If the ‘tax threshold’ by which I assume you mean personal allowance was increased (with no other changes), this situation would get even worse for these higher earners with children - as they don’t get any personal allowance at all.

If you are living on a meagre pension, you won’t be subsidising anyone else.

edit: and by all means, living on a state pension is a challenge, but it’s just an entirely separate issue to that we are discussing around childcare and tax incentives.

So are you honestly saying that once you’re child care years are over you will reduce your pension payments and pay more tax?
I read on here a lot about paying more into pension pots to avoid tax etc, I’m struggling to believe that you wouldn’t do this if you didn’t have young children

Well yes this is what the government just don't seem to understand, Logical consequences to their nonsense fiscal policies. This does not affect me because I don't earn anything like that and my kids are school aged- but the VAT on fees affects me. Like people reducing hours of shoving more money into pensions, I know fellow private school parents who are moving their children to state and as a result going part time or one parent giving up work entirely because they don't need to work all the hours. Loss of income tax to the government.

The government forget that people have agency. And higher earners who basically pay the bills for everyone might just say 'oh forget it then. I'll work less or change jobs to something I enjoy or I'll go part time. I'm just screwed over every way otherwise and everyone thinks I deserve it because I am 'rich'.'

The cliff edges should absolutely be removed. As others have pointed out there is a huge productivity gap in the Uk and the cliff edges in the tax structure is a large contributor.
There has been lots of research around childcare funding and there are studies suggesting it is a net positive to fund properly due to tax receipts and avoiding career gaps that contribute to stalling progression.
It is absolutely the right thing both in terms of the immediate impact and bigger picture.

It’s about the overall rate you pay.

With the loss of childcare, it’s like a 100% tax rate over a chunk of income - with the new system, that chunk of income might be £49,000. So, good incentive to pension it or not earn it at all.

Without children, the peak is 60% between £100-125k. You take home £10k for £25k of earnings.

You see the incentive for one is far greater than the latter - and, the more you earn over £125k the small the overall impact for a family without children / using nursery, as you are then subject to a 45% rate instead.

Without kids, I do not feel that incentivised to salary sacrifice to pension. With kids it’s a no brainer.

It is indeed.

And this is what's actually important, not anyone's feelz about needs, housing or hit taking. Unfortunately, too many people think this is a question about their personal sympathy, not whether a particular policy needs to be changed. It is not.

For the sake of balance, this is also true of various other income and benefit intersections where people might be nudged to work less.

The venom towards high earners on MN is mind boggling. I've seen countless threads on here with high earners patiently explaining that even if they earn £100k, once their childcare costs, mortgage, bills etc are taking into account they are not rolling in money. They are always shouted down by the "Well I survive on £12k a year, how DARE you complain" crew. And the sage advice that they should just move somewhere cheaper as if everyone has the option to just up sticks and move.

There just seems to be a disdain for higher earners with little understanding that if they are constantly penalised financially no-one, including lower earners, will benefit.

I earn well over £100k. This tax year alone my HMRC app tells me that I've paid just over £47,000 in income tax and almost £6,000 in National Insurance so I think I pay my fair share into the system. What do I get in return? Obviously I'm quite rightly not in receipt of any government help. But I can't, for example, get an appointment with my GP within a reasonable time frame so I pay to go private. Ditto for the dentist. I pay almost £300 in Council Tax a month and our lovely council has just announced they'll only be collecting bins twice a month from April so I can look forward to rat and fox infestations in the coming months. So I don't feel as if I get a lot in return but never mind, I'm aware I'm luckier than many and I try to pay it foward. My higher income enables me to help provide income for a cleaner, childminder, window cleaner and I always visit the independent cafes and shops in our town.

For all those who think higher earners who will be hugely financially worse off because of this ridiculous need to just suck it up...perhaps look a tthe bigger picture and understand what might happen if thousands of women reduce their salaries or leave the workforce altoghter because of it.

I get that, but surely a person can plan for that as they pass £60k and £80k?

Maybe the change should actually be a phased reduction for people earning over £60k, then another breakpoint at £80k so that the drop of isn't as steep at £100k?

I am not meaning to be provocative, and I realise I probably come across that way, however there should surely be some personal accountability here? Or is it just that the drop off seems so unfair compared to how other benefits are administered? That would be a better argument possibly?

Or reduce your hours to 80% FTE, spend a lovely day playing with your children or lunching with friends, have a very small reduction in the amount of money coming in and pay less tax. Win win for everyone except the Treasury.

Plan for it how?

PAYE earners are pretty limited in what they can do - put money in a pension, go part-time. That’s it really.

What is the ‘personal accountability’ you refer to, and why does it only apply to families with an earner on >£100k?