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."

Thank you, we’ll look into this. Yes, he has unused allowance. Does he have to file the tax return by April 5 as well? We’ve never filed one before so not sure of the deadline.

Yes ours works like that as well. We only get something 2 hours a day ‘free’.

So your full time place is £2250 per child per month!

Well I can see how you’re saying it’s expensive then. Around here it’s 1.5k full time.

Look I get it. I am a middle earner. I can’t claim UC because partly self employed as director and it’s too complicated. There are people who get 90% paid on UC and it irks that there take home is probably higher.

So in a way in a similar situation to you. Seeing people get free stuff and it’s annoying.

But equally I am in a privileged position in comparison to those on UC. I can afford to pay it even though I can’t pay savings or pension atm.

We have had to stagger children as wouldn’t be able to afford two at once in childcare. I am essentially working for free. But once the childcare is finished I will be better off than them. I will have kept my job and business. I will have a good amount to throw in savings and/ or pension.

You have two children close in age. How many years really are you working for free?

I will have had to work 7 years for free. You I assume will only one or two. You are still in a privileged position compared to me. At worst you can beef up your pension for a couple of years. So I think we should all just try to remember that. You are doing really well.

PIP cuts are linked to policy such as this. Not enough people paying in, too many people taking out. We actively discourage higher earners from working full time and paying full tax. These are the biggest net contributors - not the so called wealthy. They contribute less, less for everyone. That’s what you’re now finding out. Also, comparably middle earners are under taxed compared to similar countries - as are lower earners. No-one is working more to be worse off. Remember that when you need a consultant, surgeon or a dentist.

Yup, people like to goad the high earners / first world problems etc, but without them, the public services in this country which everyone relies upon, would break down over night.

No you do your tax return from October to January for the previous tax year. So your husbands SATR for 24/25 will be due no later than January 2026.

So put the money into the private pension, register for self assessment (you need a Gov.Uk account for this) and complete the self assessment when you get notified the window is open. It is usually October for online but the deadline for online and paper returns is usually 31st January.

When you submit it they usually tell you fairly soon if you owe more tax or are owed a rebate. If the amount owed is less than I think £3k you can opt to get a cheque/bank transfer.

Not the point of the thread at all I know, but we've just started using a salary sacrifice scheme for nursery fees and it should make a big difference to how much we're paying each month. It's called Gogetta but I'm sure there are others.

Our household income is just over £100k.

We get the "free" hours - they're not free they are subsidised - for our oldest. Our fees before tax free childcare are £360 for our 4 year old and £985 for our 1 year old. This is based on both attending 4 full days a week. We're in Scotland so don't get the subsidised hours for our youngest until November next year.

We have friends in the same nursery who get 80% funded because one of the parents were in care as a child. We don't care that they are getting the same service as us but paying less.

Childcare years are tough but even with all the explanations above I'd rather be the person earning £149k and not seeing any more of it than someone on £99k because once the childcare years are over, you are still earning £149k and have much more options than the person earning £99k.

We pay the nursery fees because we like to be able to work and have adult conversations. I love my kids more than life but cutting my days to reduce paying tax so I can watch Ms Rachel on repeat doesn't sound like much fun for me. They benefit so much from nursery, surrounded by their peers and going on outings together. Prepared to take some heat for that but it is what it is.

I wish I had your patience in explaining this @MidnightPatrol- your head must be sore from banging it against this particular brick wall!

The difference in take home pay between £99,000 and £149,000 is £22,759. That co-incidentally is a bit less than my entire nursery bill for the year.

That person on £149k may well decide to work 80% and shovel the rest in pension to get to £99,999. They’re now getting an extra day off a week, and saving money into their retirement investment account tax free.

The government is down £22,000 in tax revenues AND is giving the same earner a nursery subsidy of £7,200 per annum, so the government is down about £30k in total.

Or, the government could give the subsidy to Mr/Mrs £149k and still be around £15,000 better off. They lose twice as much by encouraging people to engineer their finances below £100k, with the risk that they never return to full time work once they get used to living on less and having more time.

@indigovapour I know, this is why it persists, people don’t realise quite how absurd it is

@Tallyrand “Childcare years are tough but even with all the explanations above I'd rather be the person earning £149k and not seeing any more of it than someone on £99k because once the childcare years are over, you are still earning £149k and have much more options than the person earning £99k“

Why does the person earning £149k have more options than someone earning £99k? In any case - the £149k earner WOULD NOT probably in any scenario not put £49k in their pension and claim the childcare.

So - they are in the same position after three years of childcare costs, just have avoided paying ~£80k in tax, claimed however much childcare they want on top of that, and have ~£150k extra in their pension.

@BreastfeedingWedding I think it’s a bit naive to just wave away the situation with ‘oh but you’re priveleged compared to most’. No one should be working for free, and they certainly shouldn’t expect to be grateful to do so in too of that - particularly while funding free childcare for others.

I am ready to be shot down and ahead of that, yes I’m sure I’ve not understood but here goes anyway as I’m interested in others’ views.

I don’t think it’s right that cliff edges affect higher earners so much and agree with those who suggest gentler tapering. It is ridiculous this 0 earning thing between 100-149, people who earn well should be treated fairly in the tax they have to pay.

But I don’t agree there should be a way to dodge tax through pension contributions. I would like the government to review this area. Why should the highest earners in particular be able to reduce tax, claim benefits, by squirrelling away money they will benefit from, falsely reducing their taxable salary.

I would like a fairer tax system for high earners so they aren’t discouraged from working, but remove, or reduce, legal methods to save tax via pension contributions.

I’m just not sure I understand your point. I thought you were suggesting reducing the free hours at lower salary levels? This would clearly mean that fewer people would benefit from the free hours and so
make the problem worse.

Im not arguing that 100k isn’t a good salary. I’m stating that the vast majority are not going to work more, for less. So they will
plan to reduce the adjusted net income to an amount below 100k. This reducing tax revenues.

As an example, i now work 4 days and pay a large amount into my pension.

Tax breaks exist to encourage people to save for old age. We really need people to do that.

However, why would you save into a pension that is locked until at least 55 if there was no benefit to doing so? If the taxed value of the money was the same in a liquid account as a locked retirement account, what would incentivise you to tie your money up for many years?

They have more options because the person on £99k doesn't have any.

What options do they need?

There absolutely should be a tax system which removes cliff edges. Certainly, at 100k where you lose personal allowance and childcare hours but also at the point you lose child benefit.
However, I think your pension point is misplaced. In my view, given the issues with ageing population, social care budget etc encouraging saving into pensions is a fiscally sound policy.
There are (in my opinion) far more blatant tax dodges by company owners that should be legislated for first (off shore companies, L&D claims, group relief…etc etc).
Paying into a pension is perfectly legitimate.

I understand the maths, thank you. There's a lot the government do not get right like the Child Benefit Higher Earner tax which I have to pay, incidentally. The tax cliff at £100k makes no sense but it's at most 3 or 4 years (assuming 2 kids) in a career likely to last 40 or 50 years.

It's similar to mortgage rates, yeah sure now I'm paying 4.79% or whatever, but I got 10 years at 2.09% as well.

Tax receipts need to be looked at over a longer term than just 3 or 4 childcare years. I doubt anyone on £149k isn't already cutting their tax bills even if they don't have kids.

It's not an "either/or" scenario.

@Kitte321 I completely agree there are plenty of other areas to change such as the examples you give. But at a time when cuts are being applied elsewhere, I don’t think it’s wrong not to consider pension tax relief as I said, whilst treating higher earners tax and these cliff edges more fairly. Arguably those at the higher end are more likely to end up with higher pensions anyway. Those at the minimum wage or average wage less likely to have thousands sloshing around to be able to take advantage of the incentive to save for their pension, though it is available to them too.

Pensions don’t dodge tax, they just shift the tax to happen at the same time as you actually receive the money in the form of a pension, at which point you’re taxed at the appropriate rate for the income you draw.

The exception is the 25% tax free element. I’d have some sympathy with that being made less generous but given that many people (including me) will have planned on that the clear mortgages at the point of retirement any changes would have to be telegraphed a long time in advance to be fair.

Well they don't have the option to earn £50k more in this hypothetical scenario, do they?

They don't need to think about putting more into a pension even although they would be stupid not to.

They don't need to think about cutting their hours if they don't want to.

As per my other post, I earn £75k and stupidly only pay 5% pension, we take the Child Benefit payment because we have a mortgage and nursery fees etc so need the money now, not in 30 years time. And (stupidly) certainly not at the cost of robbing the government of their precious tax receipts.

Why not? Go for a promotion, change jobs. If you’ve worked your way up to £99k it’s surely not beyond someone to go further in their career.

Partially to encourage people to put away as much as they can towards their pensions
That pension money is then invested and benefits the country

pensioners pay tax on all money including private pensions over the current non taxable limit when it’s paid out so the tax man does benefit in the end.

It’s worth noting If their aren’t incentives to save for retirement people won’t do so ( as much perhaps ) leading to further issues funding pensioners and old age poverty in the future.

This isn’t squirrelling money away. This is investing for the future.

Re your last para
I wouldn’t bank on much in the way of advance warning.
No Government is well known for that
Plan for the worst

Actually at 75k you’re a mid earner. You under pay in comparison to similar countries. You should be paying more and you are robbing of tax receipts in comparison to a 100k+ earner. Who pay some of the highest taxes comparatively, with no chb, pa or childcare.

I earn a six-figure salary. The only reason I currently work FT is because my company still has a DB pension scheme for part of my salary. The moment they close that and move everything to DC I will drop to PT.

I paid almost £79,000 in tax/NI via PAYE for the 2024/25 tax year. I’m pretty sure that makes me a net contributor. I don’t have any childcare costs these days - both my DC are at university. But it was hard when they were both in FT nursery (I only earned about £40k back then). I pretty much worked for the pension contributions alone.

I do sometimes feel my career has been badly timed. I got my first big promotion about 6m after the child benefit cap was introduced, and my second big promotion just as the personal allowance tapering rules came into place.