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?

The government tax things that are of social detriment, like smoking, to make it most costly to people to stop them doing it.

The government also subsidise things, like childcare, because of the social benefits of it.

Thats how it works. The social benefit of subsidising high earners childcare is that they are more likely to work and provide value plus pay more tax.

The other issue is this affects the highest paid public sector workers far more than private sector city types who will find it easier to get through the zero net increase period and come out the other side but for GPs, Consultants and Dentists there is less prospect of getting out the other side meaning they would tend to reduce hours longer term - not ideal as there's a bit of a shortage there...

I have no fish to fry as DH and I are both in professions that will top out below 100k but we'd quite like there to be a functioning NHS and this kind of cliff edge just doesn't make good economic sense...

I'm not missing the point at all.

The simple fact is that the tiny amount of income tax the treasury is losing is not worth offering the scheme to higher earners. And people earning over £100K generally don't need to be incentivised to work.

After tax and all other costs, the cost of nanny and nursery probably work out the same but it would be disruptive to DC1 to come out of nursery. And then when DC1 starts school, there’s no guarantee of getting a nursery place for DC2 . Have seriously considered it though.

The chancellor commissioned a report which showed that the cliff edges at 100k harm tax take. Not just child care but the personal allowance withdrawal. It maybe a tiny amount of people however they pay the most tax. Literally funding the majority. The government can’t afford these people to reduce productivity.

Ah, I'm sorry, I must have got my posters mixed up.

I'm not persuaded the deadweight costs wouldn't offset the tax gain tbh, but I'd have to look at the numbers earning 100-140, 140+, 200+ etc to know for sure.

But the main thing for me (as I said earlier) is that the point of the childcare subsidy is to enable and encourage women back to work. In terms of that policy outcome I don't think the £100k cohort is the one to worry about, as many other factors are at play in those back to work decisions. That may feel very unfair to those on the wrong side of the threshold, but it doesn't make it a badly designed policy like OP keeps stating.

Yes. And it's why Labour are very quiet about looking at higher tax rates for top earners, I believe.

Unfortunately quite a lot of the electorate are quite ignorant when it comes to taxes and just think tax cuts for the rich are unacceptable.

The high earners pay the most tax and subsidise others, but are denied benefits.

It’s why they backtracked yes. It maybe the minority but they are funding the majority by paying the majority of income tax. Cliff edges which stop them working and paying as much tax means there is less income to the treasury. It’s basic social and economic behaviour. Despite how much mn posters claim they would do 50Ks worth of work for free.

You really are missing the point. I will artificially cap my earnings through working less and putting money into my pension. So they will then pay the full childcare allowances.

If they paid the allowances at a higher income amount then I wouldn't cap my earnings. I'd still get the same amount from the government for childcare but they would get more tax from me.

It's literally only net positive for the treasury.

The only way this policy financially makes sense from a social /government perspective is if more people who pass that £100k barrier don't do anything about it and accept the hit. For those people you're correct that the government is better off as they save the childcare fees and continue to get more tax on the increased income. But I'm yet to meet anyone with kids in childcare who aren't aware of the £100k cliff edge and who aren't planning to avoid it through one way or another for a couple of years until kids are at school.

Also "people earning over £100k don't need to be incentivised to work" - they definitely do. Myself and several others have said we'd drop days/hours before we throw money down the drain working more hours than we need to literally be worse off.

OnMyYaught

I agree with you on the general principle that tax policy needs to incentivise high earners (and everyone who can) to earn. There's no economic consensus on where the sweet spot is to maximise tax yield generally, though, and it's nowhere near as straightforward as some posters are claiming. I also don't think this policy is the best example of it given that the cliff edge only exists for a sub-cohort of an already small group and for a small amount or time, and the purpose is a social policy rather than a fiscal one. Plus I think there are a lot of people who argue a case to maximise their personal income dressed up as an argument for macro economic policy (not saying you're doing this, but I think OP are some others are)

If I got a promotion my full time salary could potentially go up to £125k. At that point (leaving aside the option of putting the extra into a pension which isn’t very attractive for various reasons) I’d lose £500 per month by working 5 rather than 4 days, after accounting for the extra childcare.

This is perhaps at the extreme end because I have two young children in childcare but not unique.

The promotion would increase my target hours by 5 per week.

I don’t mind working 4 days anyway but the bad design of the policy does annoy me. It would be completely possible to design a tax system without disincentives to increase hours / get promoted and without cliff edges and where the tax take is still the same or higher overall.

Added to that I’m a single parent so at a £125k salary I’d make c.£6,500 per month with a childcare bill of over £3k. Not terrible but not exceptional as a household income.

Plus I think there are a lot of people who argue a case to maximise their personal income dressed up as an argument for macro economic policy

@LaBaDeeLaBaDa TBF it can be both. It can make economic sense in terms of tax and benefit someone's financial situation.

If I get a pay rise/ promotion it benefits me either way. It's just whether I take that as money or as time. The money option is better economically cause of the additional income tax. But cause I won't benefit financially (and actually end up worse off) I'll choose to take the time and put additional money into a pension instead. Basically rather that it being a win:win for me and the government, it ends up being a win:lose 🤷

I disagree with the OP about it being unfair. I don't think it's unfair. But I do think they could do a better job incentivising me to earn more. It's a moot point in a few years though. So you are right that it affects a small population for a small period of time.

I can see that there have to be cut-offs somewhere. I can live with not getting funded hours. But what I really resent is the fact that my nursery fees will inevitably be cranked up to subsidise all the new ‘free’ hours for other children because the government will underfund the scheme and nurseries have to recoup the lost cash from somewhere. As well as paying through taxes.

So you are right that it affects a small population for a small period of time.

Actually no... It's a transient population so it'll always exist whilst the boundaries are in place. It'll just be a small but consistent population.

It is appallling. My advice to women has been get yourself well over the £100k mark if you can as you then get out the other side as it were but that is not easy for most.

I wouldn't mind high tax if women could set off all childcare against tax eg £60k a year off set if that is what the childcare costs you or if the state offered almost free childcare for all but instead fewer and fewer people now support more and more and it becomes very unfair and the state loses out as those people work less. I had a doctor sibling (male) who stopped working on Sundays at one stage tax went to 50% because might as well be with the children.,
It is also a benefits issue too -that we have these income levels where people might as well not work at all as the small amount they get if they work at low pay and get benefits means work does not pay - something IDS tried very hard to sort out with UC but did not quite manage.

We seem to have the worst of all worlds, massive childcare costs, highest tax burden for 70 years and not much of a welfare state.

It's really not a problem for the members of the wealthiest 1-2% who are affected by this issue to drop their hours to stay under the threshold. It is far better for the economy and for the country and for the individuals and families concerned to have two people working at 50%fte with a salary of £60k each than it is to have one person earning £120k. I get that some people are sufficiently talented and skilled enough to deserve those salaries but no I don't want to incentivise anyone operating at that level to work more hours in order to earn more money. Working more hours at that level leads to burn out crises and all sorts of unfortunate fall-out. It would be better all around for their employers to be incentivised for anyone earning at that level to be expected to do their main job part-time and to dedicate a proportion of their available time to mentoring training and supporting more of the people currently operating at a level where the remuneration is more like £50k-ish for 100% fte to gain the skills and experience they are missing to operate at that higher level, increasing the number of higher earners rather than the wealth of the highest. Why do we need a level of super-rich who earn over 5 times more than most ordinary people can hope to? Why not build a society where it's generally flatter and more equal because once you hit an income of £60k or so you stop trying to earn more and start using your time to do other things?

It's only so expensive to live in the southeast because of self-perpetuating vicious spirals of decisions to prioritise more-more-more. We could choose to stop that. We would all benefit.

It is far better for the economy and for the country and for the individuals and families concerned to have two people working at 50%fte with a salary of £60k each than it is to have one person earning £120k

It is certainly more pleasant for those families to have 2 people earning £50K (we did this for about 4 years) and you don't need childcare. However as multiple pp have pointed out, it is definately not better for the ecomony or society. Most jobs at that level have plenty of mentorship built in.

I have a high salary and work 9-5 so certainly am not getting ‘burnt out’. I’d be much more burnt out if I was a carer, or a teacher etc. most people on high salaries earn well due to their intellectual skills. Think patent lawyers, actuaries, financial modellers. I’d see that some NHS consultants get burnt out.

People earning high salaries pay high tax and are therefore vital for this country. The reason why the government invests in education and encourages university is that an educated workforce are paid more and pay more tax. Multinational companies are more likely to base themselves in a country with a highly educated workforce. These people are an asset and the government ought to be encouraging them to work full time if they want to, rather than giving them incentives to drop their hours.

Back in the real world where we have one of the largest, economically inactive populations in the world. Who do you think is paying for all of these people?

There was an ONS report that stated anyone earning under 70k was not a net contributor when cost of services were considered.

Only those earning above this figure were paying in more than the average cost per person for NHS, government, roads, social care etc.

The reality is that society is reliant on a fairly small number of people to bankroll everyone else. Thats why dissuading or over taxing higher earners is never a good plan.

The idea that jobs earning more than 100k are somehow the kind of jobs where it is trivial to drop to 4 days a week or less, is nonsense, as is the idea that there is a pool of people to backfill the time. We are 8 oncologists down in my directorate at work, and if more start dropping hours, we’ll be even more stuffed.

It’s very easy in the SE to earn over 100k and not be well off, by the time you pay for housing and childcare. I don’t mind paying more tax but the current cliff edge is ludicrous.

What about men, can they have it all?

I am against any policy that forces more women out of the workplace than men. Passionately so.

I agree, up to a point, that two children under 5 is a choice and it is a relatively brief time when they are both in nursery.

However, the tax-free childcare also covers wraparound and holiday clubs - so the pointlessness of earning between £100 and 148k persists to a large extent through the primary years as well.

Like most people we know in this bracket, we both work four days a week and pay extra into our pensions in order to keep the tax-free childcare - because it seems pointless to spend less time with our children for basically the same amount of money.

A lot of jobs in this salary range are quite niche and employers really want your skills so are quite happy to allow you to work part time.

It works nicely for us in some ways - both being part time is a nice work life balance - but I do question whether it's achieving what the government wants..