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?

At the risk of polishing my tin foil hat, posts like this make me think they are posted by political shills before large policy announcements. Such as the Autumn Statement. Especially as there has been a steady drip about the effective tax rate over £100k lately….

I’ll eat my hat if the £100k rate is still the same on Thursday.

The reality is it hits a relatively small proportion of people.

Not many people have both a 100k plus income AND preschool age kids, and these are fundamentally well off people, who can in most cases afford for whichever parent earns over £100k to reduce hours or increase pension contribs while kids are young to avoid the cliff edge.

That's why changing it never quite takes off and gets widespread support.

I don't understand why the threshold of a state handout is even allowed to go so high. Unemployed, low earners and disabled people get penalised if they dare to have savings over a single digit number of savings and you want to complain about "penalised" for earning over £100k. Okay.

I hope you understand too that a lot of people, who's taxes go towards this state handout you are upset at not getting, earn less money to you.

You want to go abroad? I'll help pack your bags if you like

Ok (I don't have time to check your figures so let's assume you're right), but now calculate it over a lifetime rather than for the few years of costly childcare. The 100k earner is substantially better off. Even more so when they pay off their mortgage.

We don't have these policies to piss off bankers and magic circle lawyers, we have them to prevent the nursery nurse's children growing up in poverty.

Shockeditellyou
Yup, the tories are desperate, i can believe they'll try and win some "squeezed middle" there

Its still only the top 2% on a 100k for men, less than 1% for women.

Oooh score! You're comparing oranges and apples, picking and choosing what statistics to.use to prove your point.

What about the fact that she won't get a mortgage on £18k and therefore will never own her own home, what about when her children go to university and she's never been able to save a penny to help support them, what about the pension.she'll have, the career progression...

I can believe your jealous of someone on £18k for about 2 years...

This thought has crossed my mind as well.

Or a journo given the current Times campaign.

You're massively missing the point.

The government are paying out <x> amount for childcare regardless.

If I earn 99k I'll pay ~£27k income tax if we're doing very basic calculations

If I earn 120k I'll pay ~£39.4k income tax

It's not financially logical because they're paying me the childcare amount anyway. The government would have £12.4k more tax off of me if the system was smarter and didn't penalise me for it. So instead they're still paying childcare, but missing out on a bunch more tax.

I don't necessarily agree with the OP that it's unfair. But even on a society level, it's not financially smart to incentivise higher earners to limit their take home pay. Cause they lose out on income tax as a result. And that income tax is for funding public services.

The point is that someone with a ‘high’ gross salary does not have much higher take-home pay than someone much lower. And yes, that is profoundly disincentivising to work.

Because there has to be a cut off somewhere, means testing benefits cost to much so a straight cutoff works better.

You should never rely on any benefits when planning your finances this is even pointed out to those on low incomes as they can be changed by the government at any point.

As mumsnet is often fond of saying childcare cost should be split between both parents (unless your single parent, but you would hopefully then be receiving manitance from the other parent). It isn't a tax on your income it's a cost you have to fund as you choose to have children.

We lost child benefit because dh went over the threshold (only just) which meant out take home was less than the previous year despite him earning more. However, it’s a privileged position to be in that you are taking less from the state and are able to feel proud you are in a position to support those less fortunate.

i mean, by all means, apply for a job under the threshold. Realistically, once your dc is at school the subsidised childcare is gone so it’s only for a very short time and you will have a much healthier pension than those on lower incomes. There has to be a cutoff.

I have to agree with this.

Putting children in childcare is not the answer, nor should it be encouraged and as you say not funded by the tax payer.

It's a complete false economy. Pay to put your kids in nursery>parent goes out and work to pay for said nursery>child gets raised by an 18 yo with an NVQ. It really is backwards.

At least the govt stats look good and they can create false productivity.

And yet if that nursery nurse told you she'd be better off not working you'd have a few choice names to call her.

There is a similar thread on this subject and I can see there are very similar responses.

I myself am not the high earner in my relationship, my partner is. I earn £30k and where I live, I would be paying the same amount in childcare that I earn so we made the decision that I would give up work which is why the cliff edge feels incredibly unfair. I work for the public sector in a high demand job and now I am out of the job market where I could and should be contributing to the pot. Any help would have meant that I could have continued to work and instead my career is now on hold.

Savourycrepe
The point is that someone with a ‘high’ gross salary does not have much higher take-home pay than someone much lower. And yes, that is profoundly disincentivising to work

You might find it annoying, or depressing. It's not actually a disincentive unless someone is incapable of looking beyond the short term.

The tapering of the personal allowance at 100k was a disincentive to me to work harder. I reduced my hours to stay below the threshold. Made individual sense to me as I could spend more time with the kids with no real impact on my income.

At a societal level, these individual decisions have a huge impact.

It discentivises in the sense that the person it more likely to drop down their hours temporarily or ferret away money into a pension when they could be paying more income tax. That's not short sighted, that's sensible. You up your hours again once it makes financial sense.

Not to mention with the higher take home wage they'll then spend more money too.

I don’t disagree with you. As a high earning household and financial adviser I understand entirely.

Would you rather:

Work a few days less and take home 99k plus tax free childcare and 30 hours free worth about 20k in total.

Or

Work really hard every day and earn 110k and then have to pay 20k more in childcare and so take home 90k, rather than the 99k you’d have if you worked less?

Clearly the first one - less work, more free time and more money. That’s what this system incentivises and that’s the point of the OP.

Who wins in that situation? Not the taxman. Not the child.

Curiosity101

You're conflating two things there. The cliff edge on tax care does incentivise extra pension contributions / dropping hours etc. I think the net tax and productivity impact is negligible or negative when you look at the cohort overall, rather than one individual (your mileage may differ). But you were suggesting that an 18k nursery nurse having a similar income as someone on 60k is a disincentive to take the 60k job, and that doesn't stack up at all. It's annoying, not a disincentive to maximise your own long term earnings potential.

I have a lot more sympathy with the poster who's DH earns more than 100k and she could earn 30ish, because at those levels the childcare policy definitely isn't helping her to work, when on both an individual and cohort level it makes a lot of policy sense to do so. Tricky to find a policy solution for that which doesn't create other difficult trade offs.

@TotesABoats I wasn't the poster you originally responded too. I agree with your scenario about the two salaries you mentioned there. I was making the assumption you were referring to the OP / other similar people.

But either way I was just making the general point that I made up thread. I doubt it makes a huge impact overall to the country's finances, but it definitely doesn't make financial sense for the government to have this set up like this.

This is the law of unintended consequences.

Years ago, I experienced the 100K tax cliff edge but I knew if I sucked it up for a year or so (from 100 to 110K? cannot quite remember), I would come out of the woods soon and continue my upward trajectory.

If I had to lose all the childcare benefits and suck it up from 100 to 148K, I would throw in the towel and get more free time for myself at 99K and leave the powering of the economy and cost to my personal life to someone else.

Multiply that across high earning households and all that tax and GDP lost and female progression in the workplace lost. Hence the law of unintended consequences for means tested benefits.

Doubt if anyone is shedding any tears because it is great to punish high earners. A real vote winner there.

Make it universal. People who earn more will still pay more tax and at that point in their earnings it’s 60% effective tax, so it’s a huge amount. The extra they pay in tax for working more will generally pay in more to the pot than they take out with childcare.

We should be glad they pay so much tax and are working. Don’t say others are subsidising them - let’s be honest and clear, someone earning 100k will be putting in more than they take out and certainly aren’t being generally subsidised by the govt (though yes, this policy means they essentially pay less than they otherwise would because they get some back as this benefit, they are still paying in far, far more than taking).

The 10% of income taxpayers with the largest incomes contribute over 60% of income tax receipts. Keep these people doing that.

I mean this in the best possible way, you want those people working and earning tax to pay into the pot for everyone, you don’t want those people to decide they’d actually be better off working less, as nobody wins from that.

It will never happen because we probably can’t even begin to imagine the amount of backlash the govt would get if they suggested the rich get an additional benefit. Would be hard to see through all the anger that would cause to see that actually, everyone is better off as they pay more tax than they would have.

If the govt give me £5 and I use it to earn £100 and then pay £60 in tax as a result, people will complain that the govt gave me £5, not that they are now £55 better off.