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?

Very wrongly the UK moved from a we are all in together putting in and taking out welfare state of the kind Beveridge set up - much much higher benefits for out of work workers who had paid in NI than those who never did a day's work in their life. My uncle even despite being a doctor got a council house at one point in the 40s or 50s as you paid in and took out - universal, shoulder to shoulder - not one group paying masses of tax getting very little back and the other 75 just taking.

Then we lost child benefit ( I got it for my 5 back in the day but none of my grandchildren's parents get it. My parents didn't have to pay university fees but my children did (and I paid it for them). My father could even covenant money tax free to me when I started university to help pay my rent and make the minimum grant up to the maximum. All in it together.

taht has been chuipped back and back to a position where we have the highest tax burden in 70 years, £59k to £60k full time childcare costs for 2 children in London due to all kinds of reasons and a massively high tax state. it is a perfectly storm of incentives of these levels of earners to work less.

I can see why you don’t like it, but that doesn’t make it a badly designed policy.

Firstly (on your calculation of 18k a year in childcare benefits), it would only become a net gain for the taxpayer once the person starts earning about 140k. There will be many more people earning between 100k and 139k than 140k+, so the collective impact is likely to be a net loss to the taxpayer

Secondly, the point of the policy is to get people (mostly women, let’s be honest) into work, or working more hours, than they otherwise would. It’s a growth and productivity policy (also a political one, see below). It doesn’t make any real impact on growth and productivity whether you earn 99,999 or 132k (unless you choose to be part time to stay under the 100k barrier, but again you’d want to be sure that the number affected would be worth it - probably wouldn't at a cohort level)

Thirdly, it is politically unpalatable to subsidise very high earners for what is a short period of their working lives. Extending would likely have a net negative impact politically (Ie there are lots more people who will be pissed off than pleased)

So it's not a particularly badly designed policy, it’s just one you personally don’t benefit from.

I'm pretty heartbroken 😞

That’s the point. It benefits everyone if the higher earner is not incentivised to put a significant chunk of cash in to their pension but rather pay tax on it to add to the pot for everyone. The benefit of the additional tax take in many cases exceeds the child care subsidy. The loss of personal allowance is already an absolute pisstake

Completely agree that this is a hugely unfair, ludicrous taxation system. I earn over £100k when my bonus is added. I now salary sacrifice every penny I earn over to avoid the cliff edge.
I also work 4 days to minimise earnings and will until my youngest is at school.
I have no problem paying tax, I do begrudge working for nothing.
We really need to look at taxing wealth as opposed to just focusing all of the tax burden on ‘high earners’.

Sigh. Penalising the high earners again.

But you're a high earner so you're the devil incarnate, OP. Prepare to get a pasting about how you should be grateful and it's completely reasonable etc

You are simply caught by a very blunt instrument that is the government's taxation system. It is the same issue with th child benefit threshold, you either have to suck it up given the relatively short number of years your children will be in nursery, or find ways to navigate it, as have been suggested above. There is no point in asking me for the logic, I did not set the policy. There are so many inequalities in life, I simply cannot get outraged by this one.

@Kitte321 I agree the income vs wealth issue isn't often talked about enough in these contexts.

Particularly when you consider high housing and childcare costs.

Again lifestyle choices

@SiousieSoo So you have no answer as to why its fair, you just don't care because it's about people who you consider to be better off than you.

I don't really think parents of small children should just unthinkingly accept this 'because'. It's quite clearly absurd.

@Janedoe82 lifestyle choices like 'having a roof over your head'?

DH is salary sacrificing as he's on just over £100k and the tax system at this point just doesn't make any sense.

My kids are older primary so don't need a lot of childcare, other than holiday clubs. I'm not sure I expect other tax payers to fund our childcare though when we can afford to do so.

That being said, it's frustrating to know that all of this money is being paid in tax and we're not seeing much benefit from it at the moment.

Can't get a GP appointment.

Can't get an NHS dentist.

Police not interested in most crimes.

Kids' school doesn't have enough resources.

Local roads are full of pot holes.

So it's a little disheartening to see all that money go to the government each month.

But you don’t have to live somewhere hugely expensive. It is expensive due to over crowding and this isn’t going to change.

I definitely think better tapering is needed not a cliff edge. And £100k isn't an extravagantly high salary in London.

It's economically stupid to have any policy that pushes people to decide to work less /chuck everything into pensions etc.

I'm weighing up whether to drop a day a week or chuck a lot more money into my pension for similar reasons.

I agree with this.

There has been a glut of threads like this recently and they are starting to do my head in. And I say that as someone with two pre-schoolers and a salary over £100k! Yes, there’s a cliff edge which, on face value, could be quite punitive. But it’s been that way for years, and there are a wealth of options available to avoid falling foul of it - I have little sympathy for those bleating about how ‘unfair’ it is (I think my sympathy is limited to parents with twins+). What happened to taking responsibility for your finances? If you’re going to have children close together, why not save some money beforehand to soften the blow while you ramp up pension contributions for the years affected? Maybe don’t mortgage yourself up to the hilt, leave yourself some headroom? It’s a quirk in the tax and benefits system that affects a narrow group of people (amongst the least in need) for a narrow amount of time, whilst giving them options to mitigate their losses. I would’ve thought someone earning over £100k would be able to display an element of competence in their general lives, but maybe I’m wrong.

Agree OP and a lot of people here do not realise the impact of the tax and redistribution system. Low earners are very heavily subsidised to the point that they have the same take-home as apparently higher earners.

A nursery nurse on £18k with 2 kids will receive post-tax income of £35528 per year. This is based on £16,264 after tax from her salary and £17256 in tax credits, and £2080 in child benefits. And has their childcare costs paid for. And no need to repay a student loan.

Someone who earns £100k - so in theory 5 times that amount, actually gets much less than half. Their net wage is £60k out of which they need to then pay their nursery costs. In London, that can easily be £25k for two kids, giving them exactly the same income as the nursery nurse.

Just on this, maybe OP can Hospital consultants, dentists and GPs can't, it's a flat rate, either in or out @ 13.5% so with the 45% tax you see 41.5% of any extra earnings, between £100-125k it's 27.5%. I think though might be wrong there is NI to pay on this too. If these senior medics put too much into their pension they will be taxed on that too via the annual allowance https://www.gov.uk/tax-on-your-private-pension/annual-allowance

Taxing anyone 100% is not reasonable!

And yet I've never had someone turn down a promotion or pay rise which took them over 100k.

Possibly its because of all the other benefits of earning at that level, not least the increased subsidy on pension contributions which can be made up to 40k per year (last I checked) and other salary sacrifice schemes subsidised by the tax system which mean you can earn way past 100k before you hit 100k taxable.

And possibly because the costs of small children and day care are short term whereas the tax subsidies continue.

Of all the anomalies in the tax system its one of the easiest to offset or delay.

The reason we are suddenly seeing a lot of posts about this topic, is due to 'fiscal drag', and more and more people being pulled into these bands (which have no changed for a long time now).

Ditto on posts about people not being eligible for child benefit. 1 in 3 households with children has one parent earning £50k+ - it impacts a lot of families.

This isn’t new news, it’s been around for awhile. There are three options:

• suck it up
• pay into your pension to reduce your taxable pay to £99k
• If possible work 3-4 days per week so you get pro rata your full salary then go back full time when your child starts school. This way you don’t unfairly get stuck long term on a lower salary

I didn't realise that you were asking me to prepare a thesis on Government Policy. I don't have an answer to a lot of things that I didn't implement so I am not sure what you are asking for here.

I simply said that you are caught by a blunt instrument, similar to the child benefit threshold. You can think it is absurd as you like but that won't change it will it?

Again you have zero understanding of my earnings or financial arrangements so these are just not relevant here. I think it is bizarre that you expect us to be as outraged as you over this... I could list a hundred inequalities that i find way more egrigous and you would not care about them because they do not affect you so I could say the exact same about you...

Because its is not for forever. You are also investing in your career. You now have the perfect opportunity to stash as much as you can into your pension to reduce your taxable earnings and by the time your kids are accessing school you will have potentially picked up pay rises and promotions.
i do agree that it should be based on household income though.