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."

These are all ultimately interesting conversations and naturally people can have their own points of view.

Overall on this forum, not this thread, there are many who don’t understand taxation. I fully understand that they don’t necessarily need to and their income doesn’t command the 40% tax rate and then what’s being discussed here regarding childcare tax ledge.

But what does strike me on MN overall is that there’s a resentment of those earning six figure salaries without any recognition of the tax implications for those earners.

I don’t earn anywhere near that figure and in my early sixties only work part time now running my own Ltd company and in the main remain just under the 40% tax bracket, and my partner is just over the cusp at the 40% bracket.

However, I’m fully aware of tax differentials and can compare say our combined net monthly income to that of my BIL who earns over £125k. I recognise that due to his taxation his extra income per month is not as vast as others would imagine and actually represents perhaps £1300 or so extra per month even though there’s quite a difference in our combined income and his. This is something that seems totally incomprehensible to a fair few people on Mumsnet in general.

I’m with you OP.

Husband is an NHS consultant. Earns just over the 100k net adjusted threshold - lucky him. Except, if he kept hold of this money (approx 3k), we would have to find an extra 22k of taxed income to make up for the additional childcare costs we would incur without tax free childcare and funded hours. Obviously, the extra 3k goes into pension.

He doesn’t want to cut his hours as it would impact his career progression and he loves his job, so he is currently not claiming payment for extra work, as it would result in us having less money unless he made it past about £145k. I accept that he’s on a great salary, but not sure why it’s acceptable that it currently makes the most financial sense for him to work for free.

In my profession people stay in the same contracted salary but just work four days of it. When their kids are out of the expensive nursery years they move back to five days.
Their £149k salary ( as your example ) doesn’t stay at the lower amount because they are back on 5 days so back onto their full salary

They also don’t lose out re career progression because they’ve kept their hand in.

This

It's about marginal rates though, likely rhe pension will be taxed at 20%? between £100-125k it's 60%, 45% thereafter. In your second senario no one is paying thoae rates.

This all the medics I know would do this, why wouldn't you ?

I’m confused. Is the question for me or the previous poster ?

Sorry a rhetorical question. Obviously people who can will do this.

Not read the full thread and someone may have flagged this, but assuming there’s been no change to the system, most people earning £100000 would still receive the benefit as the £100000 cap excludes your pension contributions.

Assuming someone pays 10% of earnings into pension (which isn’t massive by way of contributions) you can get up to around £110000 of earnings before the tax free childcare limit comes into place.

I'm in Scotland so pay 42% on.earnings between. £43k and £75k.

I'll have to pay back approximately 50% of our CB via self assessment too.

I pay approximately £22k a year tax and national insurance.

Of course it's not the same amount a s someone earning £25k more than me.

What a strange comment.

It’s totally ridiculous. I’ve written to my MP about it a couple of times and each time they’ve just sent me the link to the childcare options site on the .gov.uk website so I can explore my options (I have none!)

the ridiculousness of it is that working full time I would not be entitled to 30 free hours because of earning over the threshold. Working part time I would be entitled to it, so I could work 3 days a week and have two for leisure while the govt paid my childcare bill! I can’t do that because my job won’t allow it. But it infuriates me that because it is also underfunded, those of us who pay for nursery have higher bills to subsidise the underfunded hours the govt pay for so the nursery can make ends meet. There will be plenty of people working 16 hours a week and claiming 30 free hours childcare.

Thank you for explaining, it’s very helpful. One final question please, I’m wondering if HMRC might come back to us before the period for the self assessment starts in October to ask for some of the money to be paid back. I know we’ve received letters in the past to say either of us owe or are owed some amount of tax back. I’m not sure now of the timings of these letters. If we do get such a letter, is it simply a matter of contacting HMRC to say he actually did not go over the 100kANI and this will be explained in the self assessment? Thank you.

You can start and submit your self assessment for the 24 / 25 year at any point after 5th April '25, you don't have to wait until October. I usually do mine around June / July (by the time I've got all my docs together) and then submit. Last year it was submitted in late July and I got my refund from HMRC in September

Highlighting this as once you submit, they don't wait until the cut off for submission to calculate what you owe them or what they owe you. I get mine out of the way precisely for this reason as then at least I know!

Don't forget that as part of the submission, you will also need to calculate any interest on bank accounts over the financial year. This is the bit I hate the most as I have to trawl through 12 months of statements.

But surely if someone works less hours to reduce their income, it’s possible someone else will work those other hours eg a senior dr decides to work 30 hours a week to avoid this cliff edge, another person will be working those other hours eg, no loss to the economy and in fact spreads the higher hourly rate around. It doesn’t work for all jobs but in many cases people choosing pt could benefit us

Surely this is a troll post. No one earning £12k/month after tax is stupid enough to post this!

It's not impossible but it is incredibly optimistic. To use the senior doctor example, we already have a real problem with unfilled consultant positions in the NHS. There isn't a big reserve of people currently wanting to work more hours as senior doctors but not being able to get the shifts.

Looking at the wider economy, we have a lot of skills shortages already. People on very high incomes are disproportionately likely to have skills that don't grow on trees, hence the ability to command top 5% wages in the first place. There are probably some instances where one person dropping hours will be easily covered, sure. But the whole picture really doesn't give us any reason to think we can assume higher earners withdrawing labour will be easily replaced.

What are you on about @roses2?

£100k per year is nowhere near to £12k per month take home. In fact that’s mathematically impossible as 12 x £12k is £144k.

Who is earning £12k a month after tax?

The OP is an article published in the Financial Times, it’s a well known issue with the tax / benefits system, which is getting a lot worse in September.

I agree with a lot of what you say @friendlycat I freely admit I’m no tax expert. At all. I pay basic wage, paye. I don’t like when high tax contributors belittle those whose chosen - or needs must lets face it - jobs or careers that society or economies are lower paid. I have seen many times on here “don’t bite the hand that feeds you”. Offensive.No matter that the lowest paid can bring the highest value in many ways.

I also find it a bit strange that, say, public sector highly paid (rightly) medics can seem to decide willy nilly to cut their hours and go part time, when there is a desperate need to clear hospital waiting lists, and in many cases get the people off those lists so they can return to work. It is weird that this awful IMO phrase economically inactive only seems to include those at the lower end. I don’t expect a very high earner who only works 50% of their time to be called economically inactive for that 50% - after all, they could work. So how come public sector employers seem to agree to all these part time request, when doing so just creates a need, as we have a shortage of medical professionals in this country to fill these gaps? What happened to business need? I do know the answer by the way - they’ll all move to private sector or Australia or something, as of course is their right, but something is really wrong when the power is all in the hands of the highly paid and not the customer.

For what it’s worth, I think that everyone- high paid or not - should have massively subsidised child care. I think that high taxpayers should see personal benefits from the tax they contribute. Other countries can do it. Get rid of the cliff edges. And I know I’m straying off topic but I would equalise tax rates from work and those from passive income a la Sunak. Treat income from wherever the same, seems the only fair way to tax people.

Assuming that there are enough trained individuals to fill the gaps. It becomes a case of numbers of available people.

I also find it a bit strange that, say, public sector highly paid (rightly) medics can seem to decide willy nilly to cut their hours and go part time, when there is a desperate need to clear hospital waiting lists, and in many cases get the people off those lists so they can return to work.

Why is it weird? It's supply and demand, and we live in a capitalist economy. Plus there's a global shortage of doctors. We simply aren't in a position to make highly paid medics work the hours we want them to instead of the hours they want to.

Who do people think pays for PIP?

Isn’t it possible to pay extra into your pension to bring down your eligible earning below 100k? So let’s say you get a pay rise that brings your salary to £105k- you make an additional pension contribution of 6k so your eligible earnings are 99k and you don’t miss out on the benefits?
I’m not a tax expert (and I’m also self employed so I have a private pension) but this is what I used to do in the days when I still relied on the tax free childcare scheme.

Maybe weird is the wrong word, I agree.

The shortage in the uk isn’t a surprise. Many years ago I would have changed med school training to ensure we would have sufficient in this country - yes subsidise the universities so they don’t have to balance the books through overseas students, no fees for these at need roles, in return commit to working in uk public sector say 10 years.

I do wonder if any requests to work part time in these scarce in demand roles are ever refused, based on business need though I expect not, as you say.

I think the point people are missing is that, yes, there are things you can do to get below 100k but it is the incentives around the cliff edge that are a problem

government needs to reform the tax system and make it more efficient and less complex and remove the cliff edges. They can do that in a way that doesn’t cost them any tax take and would probably bring in a bit more

our current tax legislation is just complicated by a series of bolt ons now and it is ripe for reform