Rachel Reeves incoherent response on the £100k childcare cliff edge issue

[MidnightPatrol]

Mumsnet have interviewed Rachel Reeves about various topics, and one of those questions put to her was about the £100k childcare cut off (asked by me).

Her response is completely incoherent - shared below for the many others stuck in this ridiculous situation (or interested in it).

Transcript:
Justine Roberts: Okay, so we've had quite a lot of questions around the tax system which is obviously your specialist subject. Here's a typical one. MidnightPatrol said: I have a one and four year old in nursery. As I earn over £100,000, I lose £25,000 in childcare support for them. I need to earn an extra £55,000 over that £100,000 cutoff to cover that loss. Where I live in London every other parent I know is either working part-time or salary sacrificing tens of thousands into their pensions to try and avoid this. Is there any suggestion that this absurd cliff edge might be changed?

Rachel Reeves: So again, this is not a cliff edge that I introduced, but is one that I inherited and I do understand what is being said there about if you've particularly got young children that you miss out on some of these key supports. Now obviously, the childcare offer is quite a new offer and it's the first time that it's been properly funded. We've put the funding into it. It is much more popular than anyone anticipated. It's actually costing taxpayers more than we originally thought. But that's a good thing because it is helping more people into work. I think it is right that it isn't available to the highest earners. If you are earning more than £100,000, you are within the top 5% of earners in the country. And I don't think you could have a system where everybody has all of their childcare costs paid because that would require even higher taxes on people to be able to afford that.

Justine Roberts: But do you acknowledge the cliff edge?

Rachel Reeves: I absolutely recognise the cliff edge and we are looking at how we can always ensure that the tax system incentivises people to work. But I think most people recognise, especially if you are in your thirties and forties and at sort of maximum earning power, that although you may lose some benefits in the short run by taking that promotion or taking those extra hours, actually you are going to progress whereby you are no longer losing out because you are earning so much more. And you know, we should celebrate people doing well and being in those very top income brackets. But I think it is right that if you are earning so much more than the national average, you should pay a bit more tax.

That garbled answer makes it seem like she doesn’t actually understand the cliff edge at all.

When people on lower wages talk about those earning more than £100k not being deserving of taxpayers money, they really need to remember that they are the taxpayer. Those on lower incomes saying they don’t want to subsidise those on £100k really need to realise that they’re not and they never will be.

If a parent drops their income from £120k to £100k via salary sacrifice, the govt loses £12k of income tax while still paying for their childcare.

It might not be the very biggest issue the govt has to deal with, but that is true of virtually everything.

Replacing the £100k cliff edge with a taper increases tax revenue (by estimated £130m-420m p.a.). That could fund more generous carer's allowance. That's exactly what the centre-left Centre for British Progress proposes doing: removing the childcare cliff-edge to fund removing the carers allowance cliff-edge.

With public finances stretched, ignoring ways to increase tax revenue just because it relates to policy for high-income people is short-sighted.

The best thing people can do with this government is work the system to their advantage. Drop hours, shove money in a pension, whatever it takes. They cannot keep taking more and more and expecting more and more from people working full time and taking care of themselves.

They need to understand that, for the majority, earning that money means you paying a lot of tax and are well educated. There is a limit to how much people will put up with, rightly they expect to have a reasonable life style earning money like that and putting their children in childcare all week. Evidently it’s ok to have your childcare paid if you’re working part time or not in work! Doesn’t make sense!

Yes, just as they do if a parent gives up work to care for a disabled child or a child with mental health issues or a partner with early onset dementia. The state could probably fund social care and the parent could work full-time and pay tax. Instead they get a tiny pittance and burn out.

As someone else said any tapering system will be organised to pay out less, not more - it's most likely the tapering would start at 80k and the funding still be 0 for 100k. Or they'd keep the cliff edge but for total parental income for couples to be "fairer", so the couples earning 100k between them would lose funding too - that's more likely to lead to women leaving the workforce than the 100k single salary cliff edge because you'll have women on 30k stopping entirely instead of someone on 100k putting more into a pension or going down to four days...

All it does is make people work less and or Chuck more into their pensions to bring their pay down !! 🤷‍♀️ we just both work 4 days and throw around 15% into our pensions so we get the free hours ! Wed work full time otherwise but it’s not worth our while

I agree OP, she didn’t address the issue in any way that is meaningful but that’s pretty hard via a Mumsnet chat.

What did stand out for me in what RR said is the idea that Labour are motivated more by what’s ‘fair’ (as are some posters on this thread) than what makes economic sense.

If more tax can be raised by removing or tapering the cliff edge, that benefits everyone. But Labour thrives on the politics of envy.

@SheilaFentiman it is, regardless of who runs the service.

In return for our taxes we get x and y. Higher earners pay higher rates of tax to support this.

Now we are saying we are introducing an almost universal childcare system for 97% of parents… but the remaining 3% are not eligible and must pay privately to use the same service… while also paying marginal rates of 60%+ tax.

And - the cost of being excluded is very significant.

All that would do is move the point people salary sacrifice to down to £80k rather than £100k.

Note the loss of benefits can be as large as £25k net. It is still very, very much worth doing to £80k for most people.

All that would do is move the point people salary sacrifice to down to £80k rather than £100k.

Possibly - though it would have the bonus of kicking in at a different level to the loss of the personal allowance band.

It would then be: child benefit tapers £60k to £80k (via the high income charge), funded hours taper £80k to £100k, personal allowance tapers £100k to £125k

Also - from a tax take perspective - it’s less likely that someone can take their income down from 89k to 79k by salary sacrifice etc than from 109k to 99k, because there’s simply less overall income to play with.

We spent a while juggling income/pension to keep child benefit, but there was a point at which our salaries were sufficiently higher than the threshold to make that both more difficult and less desirable for mortgage calculations etc (appreciate that the CB value is considerably less than the funded hours value)

(Will agree to disagree on what you consider a semantic question on public services and I do not)

@SheilaFentiman a taper is a better system than the cliff edge - but the sums involved are so huge I can’t see how you would sensibly apply it.

eg child benefit is removed across £20,000 of income. With two children it’s worth ~£3,000. Free hours and tax free childcare can be worth £20,000 for two children - so tapering across £10k or £20k of gross income doesn’t work - remember many will already face a 51% rate at that level due to student loans.

If anything setting the upper threshold at £80k to trigger tapering just tips even more workers into the ‘how can I ensure I am eligible’ group than before.

Child benefit is worth £3k, even one nursery place might now be worth £15k. The incentives to ensure you can claim are far greater.

@SheilaFentiman the report linked above suggests a taper which makes more sense, an additional 3% on earnings for those claiming childcare and earning >£100k which would reduce the cost for anyone earning >£200k or something.

Tapered, self-funded, no cliff edge.

Going back to the OP - I didn't think her reply was particularly incoherent, I think you didn't like her reply. This thread is turning into a copy of one already on here, just going over old ground. Yes, most people agreed the cliff edge was daft but do we need another thread?

@Lifestooshort71 it should be discussed extensively until something is done about it - like a whole host of other topics that are regularly discussed here.

It is incoherent - it shouldn’t be possible to end up £25,000 worse off for earning a pound more, no matter what income level you are at. And I’d argue that there’s no income level at which that isn’t an insane penalty to face.

It’s up to Ms Rachel what she does. I restrict my salary and add it to my pension. I also advocate for using the timing of my pension contributions to minimise my NI. If you are PAYE your options are limited. But, be happy to have the choice. Ultimately we pay into society, I truly believed in this. I stopped contributing once I had special needs child. The NHS didn’t provide for him and I manage both myself and my partners income, diverted the maximum of £120k in response. I hate the system and hate that I wasted time paying into it.

How can Thieves and her Mandarin husband on £350k have any idea of what is normal

By the time taxes and benefits are taken into account the gap is much less than you might think:

https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/theeffectsoftaxesandbenefitsonhouseholdincome/2024

It’s the same stuff they spout about graduate tax. That the people who earn a certain amount or might earn a certain amount should pay for the people who don’t want to work.

In a world where there is limited budget to cover growing costs, I don't see how it makes sense to help high earners out more. I am a high earner, for the avoidance of doubt. Not sure if mentioned but presumably you already get some subsidised childcare (or will do) in the form of the 15 hours benefit. I think that's pretty good going when earning over £100k.

Just remember it's a relatively short term period when you have to pay nursery fees (for most people at least) and if you are diverting funds to pension, you will massively reap that benefit later in life.

I also saw a calculation earlier which referred to loss of child benefit. I think that's irrelevant as you'd have lost that before £100k?

This my husband is just over 100k but I work full time for a charity and my salary is much lower but we lose out. It should be based on household income

@TheLette

From age 9 months I am losing around £15,000 for 30 free hours and tax free childcare.

From age 3 I am losing around £10,000 for 15 free hours and tax-free childcare.

That is a total of £25,000 I am unable to claim.

The mention of child benefit was to say £100k and unable to claim childcare help or child benefit = the same net pay as £50k and claiming them, with two in nursery.

There isn't. But unfortunately, too many people are unable to see beyond whether they personally approve of the group of people who are facing the particular bottleneck or cliff edge. Exactly the same principle applies in threads about why UC recipients might choose not to work more.

I don’t think it’s incoherent. I think it’s very clear. She agrees with the £100k cap and thinks removing it will put too much pressure on the funding (from someone also off the cliff edge).

Do you realise it’s net adjustment income, not gross income? You can deduct his pension contributions, so his net adjusted will not be £100k.

Well said!

Op i absolutely agree and well done for getting your question in, although shame you got such a waffle useless response.

Shame also so many posters cant get their head around this and why it's really quite unfair on those high earners who are subsidising so many others with their tax!

Removing the cap is estimated to increase tax revenues by getting rid of disincentives to work.

You’d think a Chancellor would know that.