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."

What is the link? We are talking here about a taxation rule that is in effect lowering the amount of taxes collected by the state. It is in everybody’s interest to avoid that.

The other topic you are referring to is about something completely different, isn’t it?

I think that's incorrect @MidnightPatrol. I don't know many kids round here who attend 5 days a week and they do get the free hours. My son attends 3 days a week and gets 15 free hours.

Our nursery has a few children who only attend the 'free hours' allowance. We're quite rural though and it's not over-subscribed. The set up might be unusual but I've heard of other parents doing the same.

I don’t understand why the state has to support childcare for anyone… I worked and had two children and we paid for their childcare ourselves (their dad and I. He also worked)

We weren’t able to buy a house, update a car, eat out, have a social life, get many groceries or take holidays for years as a result. So why aren’t the current generation of parents needing childcare making the same sacrifices and also ‘cutting their cloth’ accordingly?

Why is the state having to help out?

I was describing my nursery, not all, apologies if not clear, it was in response to someone else.

You can’t just claim the free hours - you must attend 4 days (for 15) or 5 days (for 30).

If you were trying to claim only the term time hours / two days etc, you wouldn’t be able to use any of my nurseries locally.

All the children I know do 4 or 5 days a week.

Probably something to do with the cost of living being higher, a skills and labour shortage and the population pyramid looking very different to how it did before childcare subsidy existed. You can get away with keeping more women out of the workforce when you've got a higher ratio of working age people to retired in the first place.

You’re just not seeing the bigger picture. Providing childcare will benefit the economy in the longer term. It’s also a progressive policy that benefits women and equality so probs good news all round.
As an aside, shouldn’t we be trying to make things better or do you want everything to be equally shit now as they were for you, just so it’s ’fair’?

It’s not about people ‘not making sacrifices’.

It’s the growing cost of living, far higher accommodation costs, and nursery costs that have grown ahead of inflation every year for a decade.

The birth rate in the UK has dropped drastically in the last decade.

How much did you pay per month for childcare? You're looking on average at £2000 a month for FT nursery care in a lot of places. If you have 2 kids who need it and you have a mortgage, the cost is crippling for people on average salaries

Again missing the point.... They're helping out because too many women were dropping out of the workforce or working part time due to the cost of childcare. Most governments have worked out it's net gains to help with childcare. This policy does not ultimately cost the government or the tax payer.

I don't know about the other contributors in this thread but I'm totally losing patience with people weighing in who can't seem to understand. May I suggest to the other posters that you fully inform yourself on this topic and read the many other posts explaining why the cliff edge is bad for us all, before you comment?

It feels like it should be that way, doesn’t it? However, childcare is ridiculously expensive. We’ve just been notified of a cost increase by my DC’s nursery. It’s now £1,987 per month without any funding.

On £100k your take home pay is £5,713. If you have two children (not a ridiculous expectation to be able to afford 2 kids on that salary, right?), you end up with £1,739 left over after childcare. That’s to pay for housing, food, transport, council tax and bills for a family each month. Hardly a lavish lifestyle I would say.

And before anyone pounces, I don’t earn anything close to £100k but I can see the ridiculousness of the situation and why any sane person with small
children would avoid going over the threshold.

And this is exactly what other sensible people are doing. Multiply this up and down the country and that's quite a lot of lost tax revenue.

As Bunny says she will change her position regarding pension payments once her child is in school. But why make herself worse off in the meantime? Plus she has paid more into her pension now and can reduce later on. HMRC aren't seeing any of this additional tax at the moment so ultimately they lose, which means everybody does. It's economic madness.

I'm in a rural area and the nursery is on a farm and partially there to provide childcare to the farm workers, hence there is more flexibility, also it only goes to 4:30pm. We do have to sign up to full term though and there isn't term time only provision. I'd hazard a guess that you're in an urban area as a lot of my friend's children also only go part time (either they work full time or grandparents help out the other days).

@BeHere @Kitte321 and @MidnightPatrol

Thanks for the info, I hadn’t really thought it through enough and hadn’t realised how expensive nursery actually is.

Personally, I’d much prefer everything to be much fairer and don’t like a ‘race to the bottom’ at all. I appreciate that whilst I’m not ancient, I am older than working parents, and out of touch with the child-rearing times/costs.

Is there a genuine reason why you or others wouldn’t reduce your hours? Do you feel your career would be hampered if you did?

I guess my real feelings are that we want things to be fairer for all, but many organisations are still quite ‘traditional’ at heart (despite their EDI promises) and chaired by older men whose own wives either didn’t work, or worked part-time. Within the company I work for, part time is still perceived to be a second rate choice, and show a lack of ambition. I’m always pleased when I see dads reduce their hours as that will bring real change.

Sorry - I’ve gone off on a tangent.

Yes I've resigned myself to think that I can use the time to bolster my pension as I am behind due to being unemployed for a while and contracting when I was younger. But if it wasn't for the cliff-edge I would keep the money and pay the tax as I do need to save as quick as I can to move house. I've also reigned in my side business as the extra income isn't worth it, especially with being time poor anyway.

As someone in this position- (my partner earns over the threshold whilst I am public sector part time far from the threshold!) with 2 children- I think it is helpful to remember many of us in this position use a nanny who charge per family, not per child. Using this option we find is much better value for money- better child adult ratio, more tailored to our children and zero missed days as nanny can look after when they are sick. We then use the 15hrs universal for 3 year old for preschool for extra socialising (beyond groups and classes). It works really well.
My partners comment on it is that we are fortunate to have such a 'problem'.

@Twatterati as of September, losing out on 30
free hours for one, and 15 free hours for no. 2 (plus tax free childcare), the most rational thing to do for me would be to go part-time, and then put the rest in my pension to keep me under the limit.

Is it easy to do this? I know a lot of people who have - it seems easier in certain jobs (eg medicine).

Would it reflect badly on me for doing it at work? No, but only because I would be very explicit with everyone about why I was doing it. If not, probably.

Do I want to do it? No. But the financial incentive to do so is so vast I’ll probably have to.

I suggested that in another thread and got lambasted for it.

@NewmummyJ what are you paying the nanny, as all-in in London is £40-50k a year once you’ve paid employers NI, pension, tax, insurances etc.

I don't recall suggesting reducing hours on this thread. If you are referring to my suggesting break points could come before the 100k and not after, I was only pointing out that there are other options.

I guess the thing I am struggling with is that 100k is a very respectable salary, and one that many will never see. I agree that a sudden drop of a benefit is startling, but in this instance it is one that is entirely predictable. As I said earlier, nobody wakes up and suddenly finds themselves earning 100k.

There are benefit cut off points across the board, and some of them are a good deal more impactful than this one.

@HappiestSleeping ”There are benefit cut off points across the board, and some of them are a good deal more impactful than this one.”

Can you share an example please?

Because this example means an earner on £149k earns £0 more than an earner on £99k, which I would say is quite significant in its impact.

I don’t really understand your point about ‘predictability’ - what exactly do you mean? What are you anticipating people do with that apparent foresight?

@HappiestSleeping I'd suggest going back and fully reading through the thread to understand why the cliff edge is a bad thing for you as much as the people directly affected.

Winter fuel allowance is one that springs to mind. That has a fairly harsh cut off point.

And I disagree with your summary. Someone on £149k earns £50k more than someone on £99k. They then have a state provided benefit reduced meaning that their monthly income after tax will drop at that point. As I said earlier, most people don't wake up one morning and suddenly find that they are on 100k.

The state provided benefit is not pensionable, and would not count in any bonus payment made by the employer, so it is still far more beneficial to be on a higher salary. I am making a sweeping assumption that a good proportion of jobs at that salary either have a bonus attached or very healthy pension contributions, although I know there will be exceptions.

What you've just written doesn't make any sense. As I said go back on the thread and read all the financial explanations.

@HappiestSleeping the winter fuel allowance is worth £200. This might be worth £20,000. A 100x greater amount lost.

Your ‘oh people don’t suddenly wake up on £100k’ point still makes no sense.

You don’t seem to understand the impact of losing £20,000 of income on people’s decisions, and how this incentivises them to change their behaviour.

This just doesn’t make sense. You’re also not taking into account that at this level the person will lose their personal allowance so they pay tax at 20% from the get go and then 40%.