£100,000 free hours limit - means extra £40,000 gross income?

[FrightHorizons]

I’ll be going back to work after mat leave in September.

I have two children, one will be 3 in September and the other 9 months in August.

The only childcare scheme I can claim is 15 free hours for the 3 year old.

For the 3 year old, the 15 hours I can’t claim is £300pcm. This is £5,600 inc TFC.

For the 9 month old, the 30 hours I can’t claim is £700pcm. This is £10,400 inc TFC.

This means I need to make about £16,000 net to pay those childcare costs.

This means earning an extra £40,000 gross to pay that £16,000 difference. Is that right?

I’d love to know how many other parents are finding themselves in this situation - nursery fees are now £2,250 a month for the littlest one too (they were £1,900 when the first started at the same age!).

I am wondering if I have got my sums wrong!

Can you either cut your hours (less childcare needed plus lower income so funded childcare available again) or pay more into a pension to go below £100k? That's what most people in this situation try to do I think.

I thought there was a loophole and you can just put all the extra in your pension? Unless you are such a high earner you have those pension limits too. But you certainly need to carefully plan for it.
There were previous threads about this. Once you are a higher earner you just have to tax and financially plan.

We’re paying £2300 a month for 2. Thinking of baby 3 and moving to Spain for this reason. After mortgage fixed rate running out and everything else going up, it doesn’t feel financially stable to stay in this country despite us having 2 corporate jobs

@Mia85 @Araminta1003 I think the only way of getting around it with pension contributions would be reducing my hours.

I had not been planning on going part-time but that could be the best option (looking at the overall financial picture).

Or you try living more frugally for a couple of years during the nursery years crunch, banking on continuing full-time work being a good investment in faster future career progression?

Not quite sure how you're coming up with a 60% effective tax rate. Can you share your sums?

@FrightHorizons - in that case, I would do a spreadsheet with a 15 year view. Think of the career implications as well if going part time. I know that sounds a little nuts but if you are in a career with clear progression, it is worth doing the exercise and including the necessary assumptions around pay increases. It is always important to make a rationale vs an emotional decision, based on financial facts.

What’s your current net adjusted income?

Many also try to work compressed hours - 5 days in 4 - to reduce a day's childcare costs. May not be feasible in your role / industry, though, and can be exhausting.

I think the only way of getting around it with pension contributions would be reducing my hours.

I don't understand what you mean here. What is your gross salary? If it's between £100k and £160k, just pay extra pension contributions to bring your adjusted net income under £100k (you may need to tinker with the figures if you have other benefits like company car etc).

Over £100k you also start to lose your personal allowance (at the rate of £1 for every £2 earned) so between £100k and c£125k the effective rate is 60% (+NI+any loss of childcare). There's often no/very little financial benefit to earnings in this bracket if you have young children. The incentive is to keep below £100k, unless you are very significantly above it.

But you can get around this through extra pension contributions to bring your taxable income under £100k.

Honestly I can't get too upset for you, only a couple of years ago, you got nothing until your children were 3 and was paying £12,000+ a year on two very average salaries.

Yes, that's what I said in the first post. I was explaining the answer to the Q Not quite sure how you're coming up with a 60% effective tax rate. Can you share your sums?

Ah sorry, missed that bit 👍

2 kids of nursery age (18 months apart): I have reduced to 90% FTE over 4 days, so save 1 day of nursery fee (X2 kids) whilst keeping my salary relatively high. I put the extra into my pension, if you do this then I strongly recommend you keep track of your adjusted income at least every quarter because it's very easy to get over by a couple of 100s if you don't pay attention. Particularly if you get a bonus paid in Q4!

Also, you've forgotten the 2x2k a year of "tax free childcare".

I’d love to know how many other parents are finding themselves in this situation

Not me... I earn £18k a year.

It is a stupid system but I guess there needs to be a cut off somewhere.

My childcare bill will be £48,600 though - so 4x as much.

Nursery fees have gone up a LOT in the last 3 or 4 years. A full-time place at my DC's nursery (not in the SE) now costs £20k a year if you don't have any funded hours or tax-free childcare subsidy.

It’s disgraceful though that people are put in this situation still as the country needs people working.

I too got nothing and it was crippling with three, two of which were twins and so babies in nursery. I worked just to pay the nursery fees, nothing more and technically was paying to work once travel was factored in. However, I had to work or I would lose my registration as CPD etc had to be completed every year and no one would employ me had I been out of work for years doing childcare.

The system really needs to support workers !

@FrightHorizons
Assuming you're the higher earner, just to check will you definitely go over 100k in the next tax year? It sounds like you're not taking the full year of maternity. I'd almost be inclined to suggest you look at doing another month or two at 0 pay if you can afford it, then take your accrued annual leave before going back full time. That may mean you can apply for sure for the extra hours for the older one. Not sure about the younger one, depends on cut off times.

But I feel for you, we have double fees for 9 months - at least two or three months we will be paying £3800 per month!

@Stirabout but the OP has the means to pay for the childcare, just would prefer not to and claim the free funding instead, so hardly the same. We had to stop any pension payments during the years ours were in nursery without funding as couldn't afford to and didn't have expensive cars or holidays during that time.

👆This. Make sure you are taking a long-term view. You are obviously in a high-earning profession and have a long career ahead of you if you make good decisions now.

Also, when it comes to holidays, I think there's much to be said for keeping it simple with visits to grandparents or the like when they're small. Nothing relaxing about flights with babies and hotels without all your baby equipment, etc!

I do not think anyone wants to earn extra to fund other people’s children rather than spend those precious years with their own children? Because of how this works, nursery fees are going up and those who fully fund are not just subsidising via taxes, but also subsidising via what they pay out so are doubly-incentivised to cut back on their working hours, to a level, that makes optimum sense to them personally. Both in terms of career progression, retirement and spending time with their own DC via part time working patterns. The OP needs to simply sit down carefully and work out what is best for their family. They do not owe anyone else anything!

Agree
We did the same.
I do believe, however, that working parents need additional support. Cutting down on hours as a potential solution is neither good for the tax payer or their career progression.

Absolutely agree
Its exactly the same as how care homes are financed.