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?

Yes. None of my GP friends work full-time now (aged early 50s). The ridiculous pension tax (now abolished I think) and then childcare cost issues means it made sense for them all to go part-time. Men and women. How on earth is this good for the country?

The situation is ridiculous, I totally agree. Dh and I are both stuck in the 100-150k bracket, working full time, and as a result we are both planning on dropping days at work to bring us under it. Not sure why we should both be effectively working for free for a significant part of the week due to the tax / childcare impact. From the government’s perspective this policy is so counterproductive.

I am reading this morning about the governments plans to push benefit claimants into work and that we should be "making work pay" and yet we have a problem on the other end of the spectrum where high earners are being disincentivised to work due to childcare costs, or the partners of high earners are giving up careers to stay at home and look after the children. Seems pretty barmy to me.

One of the reasons why it was set up like this is to deal with the issue that my family faced 17 years ago.

I couldn't afford to return to work as my husband's salary plus bonus took us over the threshold for support at around 32k.

We could afford for me not to work but we couldn't absorb the drop in household income that paying a child care bill more than my salary would incur.

We chose to have a second child sooner rather than later to get through the child care years quicker.

Unfortunately it didn't turn out that way and I have never returned to the work force properly.

I have sympathy with the cliff edge cut off. As a single income household changes to child benefits hit us hard (the equivalent at the time of 2% income tax rate increase on husband's salary)

However I played myself the tiniest violin at the time. You do have options, you can drop hours, increase pension contributions probably without impacting your quality of life.

I am a believer in the concept of universality but unfortunately pushing that is the equivalent of flogging a pritt-stick!

This article demonstrates well why this system is terrible for the country.
https://www.theguardian.com/politics/2023/nov/21/im-reducing-my-hours-fiscal-drags-impact-in-the-cost-of-living-crisis
You've got doctors turning down hours they could be working because they can't afford to work more, as they will be worse off for it. That is a truly broken system. Nobody should be WORSE off for working more.

From @laclochette's article:

“Like many of my colleagues I have young children and claim funded childcare hours,” says the thirtysomething family doctor. However, the doctor points to the “tax cliff edge at £100,000”, where if a household earns this much or above it loses this funding.

“This is coupled with the loss of the personal allowance from earnings over £100,000, which results in a marginal tax rate of 62% including national insurance. Factor in pension contributions and student loan repayments, and I would only take home 15.5p for every pound earned.

“I did some calculations and realised that, factoring in the loss of childcare hours and the higher tax band, I would need to earn about £120,000 to ‘break even’ with earning just below £100,000.

“As a result, after Christmas I’m reducing my hours to keep my earnings down. This means at the busiest time of the year for the NHS I’ll be sitting at home twiddling my thumbs when I could be at work seeing patients.”

Reducing hours to stay below the £100,000 income threshold was, they added, “a regular topic of discussion” among colleagues. “It’s utter madness. Apologies to patients who can’t get in to see me in February and March. I’ll be back in April.”

People who say you can cope by putting more money into your pension or by dropping hours - well yes, you can, it's good advice for individuals, but can't you see that it's incredibly bad for the economy?

• Putting more money into your pension: the govt isn't getting any tax on that money to spend on services now. So this reduces the money we have to spend on things we need.
• Reducing your hours: we have a terrible productivity issue in this country, which means we are stuck flatlining as an economy. Reducing hours contributes to that.

Maybe it would be nice to have more time with your young children rather than outsourcing their care. The long term benefit having more time with their mother surely outweighs paying more tax to the government 🙄

https://committees.parliament.uk/writtenevidence/86609/html/

can't you see that it's incredibly bad for the economy

Yes, but I'm yet to meet someone who would choose to work for less money if they did genuinely have a choice.

If the government changed the system they'd get more tax from me... But I'm not going to be ashamed of refusing to work for less money when my alternate option is more free time and a better pension.

@Curiosity101 God me neither! I literally do this. That's why I said that it's great advice for individuals - but the fact that this is the call we have to make belies a terrible system that desperately needs to be fixed.

Unfortunately this isn't the only area in which the system doesn't make sense - I sw something yesterday that said that the marginal tax rate for a single-income household with 3 kids, gross salary £50-60k was something like 72% (jumping to 78% if you include student loan) because of the removal of CB, the highest marginal tax rate across any income group.

These thresholds have all been frozen for too long. No one can really think a £50k salary - earned by ~20% of the population and rising - is a high income, but at least CB tapers. As you say, it's strange to not have a taper on at least the "tax-free" (I use quotation marks because it's a complete misnomer, even in Yorkshire it's not covering a full 20% of my costs) childcare allowance, although I can see that a taper on the hours might be more complicated to administer.

@C8H10N4O2 My recruiter tells me she is regularly asked to negotiate a salary of exactly £99,999 and no more, because of exactly this issue. so it does happen.

@laclochette Sorry! Completely misread the context of your post 😅😁

In Scotland the higher rate threshold has been frozen for much longer. It is £43,662.

It is appalling.
My own view is we shoudl have one flat rate of combined tax and NI on all income including pensioners who earn enough to pay tax, everyone gets the same single person allowance and once you have paid a particular sum of tax in a year eg £100k or £250k, then all income over that is untaxed as you have paid your dues. I think Guernsey had that or still has that. What that flat rate should be could perhaps be the current basic rate tax of 10% and main NI rate of about 13% so about 33%, a third of your income.

Or we could let all full time working parents set all their childcare costs against their tax bill nad we could be rid of all the complext 15 free hours for 3 year olds or 30 free hours for XYZ. just allow a simple tax off set and leave parents who work full time free to choose the care, child minder, nursery, nanny