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."

Yes we are Greater London so it is expensive, (£18/hr gross) but actually versus 2 in nursery we felt better value for money- as like mentioned we feel the quality of the care is better, no issues with sickness and also so much less stressful to be able to hand over your kids in pyjamas and go off to work. It's not just about the £££, but what value those £££ can afford.

Yes, how does it matter if someone knows years in advance that they're potentially going to hit a cliff edge, and has a plan in place to reduce their hours/avoid going for promotion? The problem arises when they do it, not how far in advance they made the decision!

I suspect a lot of the people losing winter fuel allowance are impacted quite significantly despite it only being a small amount.

I do understand the impact of losing 20k, I wouldn't like it either, however it isn't a surprise to anyone either. If we are arguing about whether the sudden drop off is fair, I get it, so, in my opinion removing the benefit starting at an earlier bar for higher earners (say 60k upwards), would solve that.

I'm not sure what you mean by changing their behaviour either? As far as I am aware, those affected by this have been affected for some years, so have been doing what they will do for all of that time. If you mean that someone on 99k, who suddenly tips the scales decides to put an extra 1k into a pension when they didn't previously, then fair play to them.

Also, there is a relatively small percentage of people earning in this bracket, so I can't see it being a big focus for the government with the rest of the economy being such a mess.

I'm not sure what you mean by changing their behaviour either? As far as I am aware, those affected by this have been affected for some years, so have been doing what they will do for all of that time.

No reason to assume that with childcare costs.

Even if we take as our example a person who earned over 100k prior to having DC, they'll still face a larger incentive to reduce their income once they're paying childcare and potentially eligible for 30 or 15 free hours than they did before. Basically, they may have been ok with the 100k cliff edge beforehand but be tipped over into behavioural change once childcare is factored in. And some people will only go over due to a pay rise after they already have DC.

Additionally, as others have pointed out, this is going to get worse in September, when 30 hours for 9 months comes in. It will affect more people, some of whom are not currently impacted. You keep talking about how it isn't a surprise, as though that's of even the slightest importance. It's also not going to be a surprise to some of us who've been paying attention if even more NHS consultants refuse to do overtime because of it, for example. Because it's a bad policy and it's about to get worse.

I wouldn’t be working for free when I could be at home with my dc earning the exact same money. I doubt many people would.

@HappiestSleeping

Yeah you do not understand.

1. the 30 free hours from 9 months is a new policy, introduced from September.
2. Historically, you got 15 hours from 3.
3. This means the cost of not being eligible for these policies has grown - particularly as you are more likely to have two effected children.

This changes the incentives.

• In 2023: you lost 15 hours and £2k tax free childcare for your three year old. This was worth £5,600 a year. You lost tax free childcare for your one year old. Total value = £7,600
• In 2025: you lose 15 hours and £2k tax free childcare for your three year old. This is worth £5,600 a year. You now also lose 30 free hours for your one year old. Total value = £14,800

So - because of these change, everyone else is getting an extra £7,200 in my example, but the £100k earner… does not.

This means (as in the article example), earning any less than potentially £149,000 leaves you WORSE OFF financially than earning £99k.

This incentivises people to work less and put money in their pension, both of which reduce tax take far below the cost of providing the benefit.

Thank you for the summary. I had not grasped the recent change. What was the comparison before? There must have been an equivalent before the change, so what was the equivalent of the 149k before the change?

I still hold that it is, while unpalatable, a nicer problem to have than the majority of the population who earn nowhere near this. Ultimately, 4% of earners are on >100k, and 2% are on >149k, so this affects 2% of earners.

Why have you now decided it only impacts half of workers with children earning over £100k?

That it’s a minority of the population that have the issue isn’t really the point - this group pay 30%+ of all income tax, and the policy is incentivising people to work less and pay less tax, as you can see from countless posts on this thread, which is bad for tax take but also productivity in the UK in general.

Not quite. My household don't even earn 100k between us, but we still use services provided and paid for by the tax take of people who earn that amount. It'll affect me plenty if me or mine miss out on medical or dental care from someone who stops working on Friday afternoons or turns down overtime due to this, for example.

There is consistency.
You want high earners to work more, generate more and pay more tax as a result. Current policy forces them to reduce hours means overall tax take. £100k cut off is reducing growth and tax intake.

You want every able person to work, to grow economy, pay tax and not consume for the state. PIP policy will achieve this. It's not talking about removal of benefits from those who really need them but filtering out those who can work to some extend.

No @HappiestSleeping this affects everyone including you, because this means the top % redirect their income which could be taxable in order to stay under the threshold and still receive the childcare provision. Few of us are actually losing out despite it being inconvenient, as we'll get the money back via our pensions at some point or spending more time with our kids. Who loses out is the general population who are getting less of our tax receipts. Those tax receipts could be quite significant (if people earning £149k redirect 30% of their income).

Due to inflation, 4% of the population currently earn over £100k and this is growing all the time. As it stands that's 2.7 million people. If all of those people redirected an average of £20k of their income that comes to £5.4 billion, of which around 45% would be tax receipts. Obviously that is approximate, not everyone earns as much as £149k, not everyone has children, but we're likely be talking about potentially at least £1bn lost in tax receipts due to this policy.

Does that clear things up?

That is the point of the thread which I don't think you are grasping. And that's why we're saying it's madness.

Highest 10% of earners pay 30% of all tax take. If 6% out of those 10% change their behavior you're screwed.

@Bunny44 slight back of fag packet calculation but…

c. 100k families impacted

tax paid on £100-149k is £26k.

If they’re all salary sacrificing to get the hours, that’s £2.6b tax revenue lost.

And that’s before you consider the cost of funding the childcare, which would have a far lower value.

It’s even more extreme than that.

The top 10% pay 60% of tax receipts.

The top 1% pay 30%.

The above is a good summary.

Plus it may be the minority of people to you BUT and it's a very big BUT
this group pay 30%+ of all income tax.

Agree.
These thresholds simply don’t support work and reduce tax paid as a result.

I paid to work whilst mine were in nursery before the days of free hours. I was actually out of pocket once travel was factored in. I wouldn’t do it again and tbh I really don’t know why I bothered. It’s a huge regret of mine.

I'm assuming it's more like £1bn as there are people like me who earn around £120k and there are lots of people without kids.

But those without kids are those who are more likely to be overpaying into their pensions anyway (as less outgoings). People with young kids often need as much of their take home as they can get get and hence why I said I wouldn't be putting extra money into my pension if I didn't have to.

Next year I'll be paying around £25k extra into my pension to qualify for the childcare. That's over £10k less I'll contribute in tax.

Those who say we shouldn't be able to use the pension route, well if they took that away I'd just try and drop a day from work as I'm not working more time to spend more time away from my child and pay for the honour of doing so...

After reading the article this morning, and then calculating my husband’s net adjusted income, we’ve just realized it’s over the 100k threshold due to a one-off bonus he had not considered. The cut off to pay more into his work place pension for March has passed. I need some advice on realistic options to take him below the threshold before the end of the tax year on 5th April. Any useful advice is welcome, thank you.

I was told you can retrospectively add more to your personal pension, but sounds like you need to consult an accountant ASAP.

It’s worth noting that people do a combination of maxing out pension contributions and reducing hours in work in order to keep within the limit for free childcare.
and why not given the current system.

@Bunny44 yes although - others will also be earning more! Earning over £160k you might want to reduce hours and use pension contributions - such is the size of the benefit.

Even at £120k, the tax paid on that amount is £12k, so it’s already far more loss in the tax than childcare is worth for one child.

SIPP today. Vanguard or any other. Pay cash is, remember government adds 20% so make sure it's under 60k for the year (unless he has unused allowance). He then will be able to claim back via tax return

In my job / industry it's very hard to go PT, and little point as I'd still end up doing my current job but with less pay.

I try and overpay into my pension but I'm still over the limit and tbh we need more of the money now, even tho it's highly taxed.

I've been idly looking for new jobs, and for under 100k as there's no incentive to earn more.

This has affected us and it’s not just nursery that hits. Wrap around school care for my two kids is £9000 per year and then add in school holiday clubs it doesn’t get much better once school starts.
My DH earns just over £100k but I earn significantly less as a nurse. I would have loved to have kept working my permanent job but it’s not worth it after all the childcare costs so I gave up my job and only work a few hours here and there to keep my registration valid until the kids go to secondary school.
If we had some help with the childcare costs then it may have changed my mind and there would be one more nurse working.

There is also the long term impacts on behaviour.

I have worked 80% FTE since my children were small. We’re now way beyond the point where the childcare changes will affect us as a family but I still work 80% FTE. It works well for us as a family, it is still nice to spend time with my big children, they have both had their issues so useful for dr appointments etc. I have no intention of going back to work full time. This will end up being a significant reduction in the amount of tax I would have otherwise paid over my long and well paid career.

The government shouldn’t be pushing people into dropping hours to 80% - a lot of them will like it and do it permanently!