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.

Your right. Not the same. One socially encouraged and socially acceptable. One not. Both in fact legal.

And Yes I understand that. But what I am telling you that you are not understanding is that this happens to everyone at every scale. High earners are not unique!

I earn c. 50k. Last year I fucked up the maths and it turned out at 52k. Got hammered on that 2k. Not worth it. So I should have put that in pension and will do this year until it gets to the point where I may aswell take the money because it’s bettering my life and I may aswell.

Same for those on UC credit. They have the same earnings problems.

Everyone has this problem!

So if we fix it for everyone then sure let’s do it. If it was me I would scrap all benefits. Every single including pension. Pay every adult a basic income of 18.3k and tax every single earning at flat 50%.

Incredibly you could pay off the national debt in just under 10 years with some change spare.

What do you think to that OP?

@Nonameeo in response to “But what I am telling you that you are not understanding is that this happens to everyone at every scale. High earners are not unique!”

There are dysfunctional tax incentives at various points - but no, it isn’t happening to everyone at this kind of scale.

You were ‘hammered’ on your £2k gross earned over £50k by paying 42% tax and NI. You try to avoid that.

I pay 62% tax on earnings over £100k plus immediately lose £25k net equivalent of childcare help. So I would take home less vs earning £100k, unless I earned over £155k.

That is a huge amount - and creates a very different problem to you having to pay the higher tax rate.

No it was worse than that because of some strange accounting interaction. I believe dividend higher rate; which you pay after corp tax, and child benefit taper and doubled my student loan interest rate. Basically it was just a fuck up on my part. I think it was around 60-70% plus the interest rate issue. Couldn’t remember without getting the paperwork. And I couldn’t explain to you either fully. Hence having an accountant.

If you are paying 62% then why not pay the 50% flat and we pay off the national debt. I am up for it. I think with AI we will have to do basic income soon anyway so hopefully that comes with a flat rate tax. I do like simplicity I agree OP.

And I am up for solving the cliff problem. But they need to do it for everyone at all levels.

We do need to fix the ridiculous disincentives we have scattered throughout the system at all levels, yes. I don't see much point in debating which is worst because we can't afford any of them.

If you are paying 62% then why not pay the 50% flat and we pay off the national debt.

Because OP is not paying 62% on her whole income, just the top slice.

I’ve no idea how we got on to the subject, but I remember trying to explain UK income tax thresholds to an Australian and him being baffled by the concept. According to him, income tax in Australia is charged on a sliding scale and there are no cliff edges. That sounds so much fairer and more sensible.

Personally, I wouldn’t want a flat rate of tax and a flat rate of pay rises and pension increases etc. That approach only widens the gap between rich and poor.

Did he explain their negative gearing tax policy? If we’re talking crazy tax, it’s a doozy.

I don’t agree that it’s incoherent. I do agree that the cliff edge is wrong though. I’d be interested in whether anyone has done any work to understand whether removing or tapering it would actually result in more tax being paid as people no longer have to avoid being over £100k.

I’m looking forward to no longer needing childcare next year and finally being able to go over £100k. I’ve limited my income to below £100k for years and now have a much lower standard of living than I used to, as all costs have gone up but my income hasn’t. Still, my pension is looking very, very healthy so swings and roundabouts.

In fact, I think I can answer my own question, because the restriction of relief from national insurance on salary sacrificed pension contributions was surely a response to soaring use of salary sacrifice schemes. Which must be due, in part, to parents ensuring that they qualify for the childcare subsidy, as well as people just not willing to pay such a high effective marginal tax rate on earnings between £100k and £125k.

As there are a number of cliff edges and illogicalities in the tax system, it wouldn’t be very philosophically consistent for Labour to fix this one first, ahead of anything relating to UC and work etc.

I agree with your rationale although there are a few ways to skin a cat. One would be to make the childcare universal, another would be to phase it out at a lower level of earning and much more incrementally. Someone needs to crunch the numbers and work out the impact of the different approaches.

We also need to look at the bottom end where childcare costs more than what the parents are earning or contributing in tax. In many cases we are paying an awful lot of money as a country for some people to work in unskilled, minimum wage jobs whilst we have millions of people out of work and looking for a job like this. I'm not being derogative about this kind of job but ultimately you don't have to keep up skills and relevant experience working in these roles in the same way you do in other work so it is a lot more possible to take a career break, look after your own kids and then go back to work at the same level you left at.

Yes so it averages. At less than that. But you get UI and there’s no ledges.

With 18.3 UI and 50% flat then the tipping point is just over 90k. So OP would be paying a little bit more. But would also not having any ledges or disincentives.

And I am sure actually that OP probably wouldn’t mind paying more tax if our public services actually were properly funded and worked, our books balanced and our national debt was paid off.

I think what should be done is a gradient from 75k to 100k where the childcare support reduced gradually.

I dont think if you earn over 100k you should be getting help with childcare.

I do also think it should be based on household income though not just a single person's wage.

so it is a lot more possible to take a career break, look after your own kids and then go back to work at the same level you left at.

Is it, though? Or would a recruiter go for the person without the career break every time?

What's the average full time wage in the UK? 40k? Maybe if it's for household income it should start at double the average wage and taper to nothing at three or four times.

Should households with a sahp get the same amount of subsided childcare as households with a single working parent or two working parents though? In most cases childcare is a luxury not a necessity if the spouse of a high earner doesn't work, which makes funding it from taxation morally dubious.

I assume this discrepancy is why it's not done on household income, but single parents of small children earning over 100k weren't taken into consideration as they're relatively rare statistically.

Should households with a sahp get the same amount of subsided childcare as households with a single working parent or two working parents though?

I don't believe households with a SAHP do get the Free Childcare for Working Parents (i.e. the 30 hours) scheme. Both parents in a household have to earn at least 16h p.w. at the National Minimum Wage to be eligible (unless they have an exception like being on carer's allowance)

Yes there has to be a cut off but it shouldn’t be a cliff edge. It should be staggered, depending on how much over the limit you earn.
I did understand RR’s reply but she wasn’t sympathetic.

They could bring it in line with student loans,. Maybe even offer the childcare vouchers at the exorbitant interest percentages graduates pay.

I would rather my colleagues with babies and toddlers can afford to eat than subsidise someone earning 4x the minimum wage out of my taxes.

Plan 1 will be the lower of RPI (current 3.2%) and base rate + 1%

Plan 2 rates have been capped at 6% now (previously RPI + 3%).

Plan 5 (loans since 2023) are RPI only.

So the interest rates are certainly less than they were for plan 2, which is the harshest rate.

We didn’t get anything other than the 15 hours from 3 as my husband was over the £100k during nursery years. I accept we were high earners and didn’t warrant the support. However, the cliff edge is objectively stupid particularly when combined with the other tax effects at that point. I too know people who have reduced hours, taken unpaid leave or put more than they really wanted to into a pension. on the pension front, yes people will benefit later on but that doesn’t actually benefit the economy in the short term as it would be better to have that money being used.

As I earn over £100,000, I lose £25,000 in childcare support for them.

Please could I ask - where does the figure of £25k come from?

DD spent £40,000 last year on childcare for twins - I think many people forget they are also paying the 40% tax rate.
No wonder people clear off abroad.

Child one: 15 free hours (£8k) plus tax free childcare (£2k).

Child two: 30 free hours (£13k) plus tax free childcare (£2k)

= £25k

My total annual childcare bill is over £50,000 for two places (!).

It’s actually a 60% rate between £100-125k - so even worse.