100% effective tax on earnings £100-148k

[Childcare47]

I have posted in the past about the impact of loss of 15 'free hours' plus loss of 'tax free childcare', which combined with the 60% tax rate creates a severe cliff edge in earnings.

The situation is in fact even worse - as it has been announced parents earning >£100,000 will not be eligible for any free hours from 9 months.

For two children therefore:

• Loss of £4,000 annual tax free childcare
• Loss of 30 free hours for the under 3 = £800pcm
• Loss of 15 free hours for the over 3 = £400pm

This is £18,400 a year lost if you earn a penny over £100k.

To therefore break even on that £18,400 loss, you need to earn... £148,000? To have exactly the same income as at £99,000?

Why does the government not address this absurd 'quirk' in the system, surely not one can think its right to be taxed at a rate of 100% on a third of your income, what's the point in earning it?

It’s worse than 100% tax. Someone earning, say, £130k will be worse off (have less take home pay) than someone earning £99k.

I stayed part time (and salary sacrificed into my pension) for years to avoid this. I’m only going full time now that I don’t need much childcare because my kids are a bit older and I’m 100% remote, so can pop out and do the school run most days.

For me it’s been 5 years of being under employed to avoid working more hours for less money. Yeah, world’s smallest violin and all that, but it’s not great for the economy if parents make perfectly sensible decisions to work less because it means that they’ll actually earn more that way.

Nor am I- I also was once a high earner with no family support who had to pay for childcare. That’s the reality of having children. I got 15 free hours and then had to part time. It’s a relatively short period of time and shoving babies and toddlers into full time daycare is not something that should either be encouraged or paid for by the tax payer.
I am sorry if that seems brutal but I think more honest conversations need to be had rather than telling women they can have it all. They can’t.

’not great for the economy’ vs what is best for the baby 🤔

Indeed.

£5k for two is awful - I think my current 'worst case' is £4,400 for two. Crazy sums.

Let's hope they at least keep the 15 hours at age 3.

Don’t forget that over £100k you also lose your tax free allowance so the loss is greater than you have calculated

It’s always been implied that the additional hours from 9 months will only be for those who are entitled to the 30 hours at 3 plus.

Are you also saying that the universal 15 hours at 3 plus, regardless of how much the parents earn, is being removed?

No. There is no endless pot of money.

Measures to help must be targeted to those most in need. Those more able to pay should.

I guess it would only probably be for a year or so?
So the decisions you have to make are the same as the people who pay to go to work because of their low salary vs childcare plus commute etc but decide it's worthwhile to not give up their career/keep up with their pension payments. They decide it's only for a short while whilst the children are small.
The system isn't perfect, but I think the government would get more back lash if they were subbing childcare for folk on £100k+. Tapering does make sense yes.

That is very high. What does a nanny cost?

@Willyoujustbequiet what's the point in earning the extra £48k if you end up with £0 benefit though?

You need high earners to earn money to fund all these services. If they are taxed at 100% they're just going to stop bothering, as proven by @WutheringTights example above, cutting hours and so on because there's no incentive.

It does incentivise dropping hours, upping pensions contributions and generally not anything that's beneficial for society as a whole. Both me and DH are in that situation - we could be paying more income tax but we don't gain anything from our wage going up. Instead we're dropping down on hours and upping pensions contributions.

Why would I work more hours of I'm not going to get paid for it. The system effectively causes me to artificially stagnate how much tax I pay. I will then up my hours back to full time and drop my pensions contributions back to a normal rate once both my kids are out of full time childcare. When that happens I will be better off financially and I'll be paying more into the tax pot, it's a win win. Just daft that we're in this weird middle ground right now which encourages capping earnings.

5k a month is 60k a year. Does a nanny cost more than this?

The point is that once your kids hit school age you'll get the benefit of your high salary back. They're only in nursery for a short while, especially two at once unless they're twins.
I chose to leave a 4 year gap between my two because I couldn't afford two in nursery at once, we all have to make these kinds of decisions.

But you aren’t being taxed- you are just not getting as much subsidised childcare.
There will still be plenty of high earners. Same argument as ‘if they cut bankers bonuses they will all leave the uk’- utter nonsense.

Scandinavian countries are widely thought to be the happiest in the world. Childcare is about £150 a month per child and you are thought of as a bit odd if you don’t use it in full, but then again they see the benefit of keeping all women in employment- esp those high earning taxpayers.

@Curiosity101 It is strange that the biggest contributors to their pension annually includes this chunk of parents of preschoolers - who have high costs, big mortgages etc...

... but the only rational choice for those years is... huge pension saving?

But many parents with slight older children never got this benefit anyway. Mine are both high school now and you only got free 15hours at 3 years.

I'm not saying that childcare shouldn't be more affordable. But should higher earns really have it? And weather if feels like it or not £100k is a higher earner. Not very many people on are such a high salary.

And I know it feels unfair when a household can earn more then a single parent. But there has to be a cut off somewhere. To be honest I felt similar when I wasn't earning yet we couldn't use my tax free allowance, (I know they changed that but.only after I went back to work). The problem with making systems to complicated to admister is they then end up.costing more to run.

'It's 100% tax on £48,000 of earnings. No one in their right mind is going to accept that without complaint, it's obscene.'

Another way of looking at it, is that a salary of £148k is obscene. No one should be getting paid 10x more than a carer or nursery worker of any of those other hard hard jobs that are paid peanuts. My exhusband, for all his faults, always felt his salary was ridiculous for doing a job he loved. Don't think of it as a salary of £150k for which you end up with £75k of but rather think of it as a salary of £75k. Or whatever the numbers are. Just reframe it. You haven't 'lost' £75k.

Yes it is stupid in the extreme

Sweden gives 480 paid leave when you have a baby. The mother is at home much longer. They also pay a lot more tax in Sweden to fund this.

You can play the system and make extra pension contributions to bring your net pay down to below the £100k figure. As you also start to loose you personal allowance anyway after £100k of earnings thats another reason to make a larger pension contribution.

The point of earning the extra £48k would be that once your child/children are in school and your not paying so much childcare then you will be earning more and your salary is more likely to go up more over the long term.

I'm sorry I find it hard to feel sorry for higher earns like you when people like me either gave up work as wouldn't have been able to afford child care or women are effectively working for nothing at all as it costs them so much, but are doing it to stay on the career ladder.

@MigGirl

"I'm not saying that childcare shouldn't be more affordable. But should higher earns really have it? And weather if feels like it or not £100k is a higher earner"

Sure, it is a good salary - but childcare costs are obscene and eat up a lot of it.

A poster above says they are paying £5k for two under 3s (presumably in London). This is 100% of a £100k income's take home pay, if they have a student loan.

And - no one is asking for you 'to feel sorry for them' - I'm pointing out that ludicrous cliff edge in the tax system which means people are taxed at crazy rates. You shouldn't have had to quit your job because you couldn't afford childcare, but nor should a high earner be cutting hours or being taxed at 100% for the simple reason they require childcare.

As someone earning considerably less I just can't care about this. I don't see why childcare should be subsidised at that level of earnings. You can put money into your pension to offset it. It won't be forever.

Yes- and it is a lifestyle choice to be in this position. As some else said- many of us have had to either make career choices to accommodate having children close together, delay having a second, or not having any more babies at all as can’t afford it. There isn’t an infinite amount of money available to fund the childcare costs of high earners so they can keep all of their 5k a month.