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."

Why are people so angry at wealth that they can’t even understand what this is about?!

This is not about ‘do they need it’ it is about the detrimental effect on taxes (is less money for all of us!) because if a cliff edge.
Nobody is saying ‘give free childcare to people earning 100k’!
But instead of giving the full childcare entitlement to people earning 99.99k and 0 to the ones earning 100k, why not for example taper it down between 80 and 110k?
The amount of free childcare paid by the state would be the same BUT more taxes would be collected as people wouldn’t lower their earning just to avoid the cliff edge.

The difference with the PIP debate is that here the idea is to increase taxes collected by the state.

I agree there shouldn’t be such a cliff edge but I think it should be achieved by decreasing help for those just under £100k. I don’t wan5 to be all “back in my day” but my dc is still in primary and we only got 15 hours from age 3 for her. It was tight (dh and I earned about 30k and 60k) but we managed for the short time. I’m all for people on nmw and below average salaries getting more help but I do think it should have gradually decreased by 100k.

This. I can say it doesn't affect me because I'll never earn that much.

Except it probably is affecting me in the sense that the NHS consultant I want to see doesn't want to work any more hours or has dropped them.

The people who should have the disposable income to spend in the shops and cafes my teenagers would like to work in are instead putting that spare money into pensions or dropping a day to earn less.

It has an economic impact and it's wrong to dismiss as 'just a problem of the wealthy'.

Fully agree, it is becoming ridiculous.

Most of the haters also conveniently forget that we (net contributors) are the ones paying for the benefits they receive. « I pay taxes too » they say - but if you receive back more than you pay in, you are not really contributing.

They should sort the child benefit unfairness before they sort the £100k childcare cut off

I mean that if someone knows they are going to be earning more money, and that in doing so a benefit will reduce, it is possible to cut cloth accordingly. I did so during my working time.

And wouldn't putting it in a pension be worth retaining the benefit? At least it isn't 'lost money' so to speak.

And how would you suggest that is done?

As they changed the thresholds but…. All that did was move where the unfairness kicked in!

I'm in the same position. I paid 55k last year in combined income tax and NI. I have no issue paying tax etc to provide a welfare state and to support people who need it, but I do have an issue with the fact I'm paying it and cannot access any services in a timely manner

8 week wait here for an NHS non emergency GP, hospital wait time for non urgent is 18+ months etc, our local CAMHS service is decimated, libraries have had to slash funding and our council tax etc has risen to try and cover rising costs

In addition to the tax and NI I pay, I also pay for family BUPA medical cover on a monthly basis so we can access GPs and healthcare and the same for private dental. These are taxable benefits and ironically our monthly payments have gone up and excess risen by 150% this year due to 'unprecedented' demand on the scheme i.e. more people are using it as they can't get treatment through the NHS. I've also paid 1000's for private ADHD assessment and meds for myself, as the wait time here is upwards of 5+ years, and am looking at the same for my kid.

To some people this will seem 'lucky' and how can I complain when we have the money to be able to do this. I'm older so don't have much debt and prioritise budget for stuff like healthcare / insurance, but we are paying 1000's per year, on top of the income tax I'm paying to access services that we're already paying for. I don't know what the solution is tbh but I'm getting increasingly annoyed by it.

This. 100%.

The ‘cutting your cloth accordingly’ here is going to be working part-time and putting money into your pension.

Up to £200,000 you will be better off going part-time and stuffing your pension.

Thats not a sensible piece of policy - HMRC might lose £60,000 of tax and have to pay you the £20,000 in childcare support, all because their tax system has incentivised you to change your behaviour to avoid this massive cliff edge.

Losing £49,000 of income is a huge amount.

I think the childcare benefits should be universal, as should child benefit, like it used to be. There are costs involved in calculating benefits just for certain incomes, if it just went back to universal, people earning just over wouldn't have to decide to work less hours ( and therefore pay less tax) and it would be good for children too.

How are they calculating that?

Tax free childcare is up to a max of £2000

Free childcare is anything but. We are in 3 short days and it saves us about a tenner a day. So about £200 a month saved. So that’s another £2.4k

How are they not better off?

The ‘cutting your cloth accordingly’ here is going to be working part-time and putting money into your pension.

I was thinking about it more from the point of view of someone going from, say £80k to £100k gets an extra £1000 per month after tax. Maybe that could be used to counter the reduction in benefit?

Also then, would a reduction of, say 33% of the benefit at £60k, and 66% at £80k make it less of a drop off when the 100% reduction happens at £100k?

Oh I missed childbenefit sorry. How much is that now?
£1300 first child.

So that’s 2000 + £3600 (extrapolating guesstimate to be generous at full time provision ‘free’) + £1300 = just shy of £7k.

How is that £45k!

30 free hours at my nursery is worth about £800 a month.

So £11,600 a year inc tax-free childcare.

So £23,200 after tax if you have two kids - about £48,000 for me, pre-tax (over £100k).

Lol. I assure you it’s not unless you have the golden goose rarity of nurseries.

No nurseries here offer the ‘free hours’ like that. Unless you can get into a pre state prep at 3.5years and then they offer the full hours 9-3 and you pay for lunch hour only.

You know that doctors are highly trained people with a minimum of 11 years of education and training behind them, don’t you?

You can’t just magic up an extra 40% doctors to fill the gap on a whim.

My pension also won’t be taxed for another 25 years. It hardly helps balancing the books now, does it?

There are some people who think that, yes. Arguably it's no bad thing for more of us to pay more into pensions. But there's also option B, work less. Meaning your skills are less available and you pay less tax.

But how would reducing the hours funding even further (to catch more people earning even less) help? You do realise that this impacts a higher % of women and will just reduce equality even further?

Yep. DH and I had a nursery place reserved for our baby. Nursery increased the fees substantially, partly to off-set the free hours. We don’t qualify for any free hours, so it was going to be a significant jump. So we’ve gone with a cheaper childminder instead.

It most definitely is this as well as the reduction in tax payable to HMRC.

Not one of the doctors at my surgery work full time now so what a surprise it’s harder to get an appointment. You will find this pattern replicated in many places that it’s now better for many professionals to keep themselves at slightly below the £100k threshold by dropping a day or two as financially they are worse off if they were to work 5 days a week.

But there are many on this forum who don’t understand taxation. Too many see an income of over £100k and equate it to their salary that’s taxed at 20% plus forget the personal allowance that they benefit from before taxation. Over £125k and you lose the personal allowance as well.

I hope you were equally sympathetic on the threads about people who will lose their disability benefits.

Speaking for myself yes.

You can think a whole range of things at once- sadness for the benefits cuts and concern for those affected and wonder at the fiscal incompetence of targeting net contributers. I think I've even posted on the whole gamut of threads.

You have to attend 5 days a week to claim the hours, you can’t just eg attend two days a week.

And it’s spread over two days basically, as the nursery is technically open 11 hours a day, which you have to pay for regardless of whether you use it.

The remaining fee is still far more than the other 60% of hours technically paid for…! You still would be paying £1,450 a month.

A trend I am actually seeing is nurseries not offering the extra 15 hours at all. Which I imagine will be quite common.

Yes I will, as I would rather have the income. As a single parent who's trying to save up to move house I could do with the money now rather than putting it in my pension. My plan is to reduce pension payments once my child is in school.

I don't mind about paying a bit more tax over £100k but the childcare hours cliff edge means I'm actually worse off earning more so forces my hand essentially.