£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!

It's nuts and part of the reason we are losing so many net contributors to other countries. Childcare should be universally subsidised. It's a women's issue. Mothers almost always the ones to limit their earning by going part time etc.

I’m not willing to pay an effective 70%+ tax rate on half of my income.

If I can avoid this by moving to part-time and using pension contributions, this is the most rational thing to do.

If the government want to exclude people from such huge childcare subsidies, they are going to see the same behaviour from others. There is a large earning range where there is just no point.

I think your sums are a bit out £16k per annum assuming 40% tax and 5% NI is £29k gross income

@peeweemermaid you lose your personal allowance at £100,000 so the tax rate is more like 60% until £125,000

So between £100-140,000 your additional net pay is £16,000

Finally. Careful though, this won't go down well here! Rich people claiming benefits from the government is very much accepted and encouraged here.

@DonnyBurrito I would rather work full time and pay tax as normal to best honest, but with a 70%+ tax rate on everything over £100,000 - I am being heavily incentivised to not.

I doubt many people would enthusiastically work for 30p in the pound six months of the year.

Apologies for not reading post and traffic properly. For me it was about sustaining my pension and career aspirations, but I was working for pennies in the pound.

Yes you maximise your pension in these few years and then once they are back at school, you can do a few years of less pension and enjoy the extra income. The state is not really losing out as you are making sure you are taken well care of in old age and you spend some quality time with your own children.
At least you can make it work somehow. Those earning over 250k I think cannot even put more than 10k into a pension. Those are the ones leaving, en masse.

Those who cannot do the pensions instead are going to the Middle East for 3 years where there is an abundance of excellent childcare.

Those earning over 250k I think cannot even put more than 10k into a pension.

Just to be picky, they can put however much they like into a pension. They just lose the tax benefits.

But @FrightHorizons if you would have to put an additional £50-£60k into pension to get under £100k then you are NOT in the tricky £100k-£125k zone (which is the zone where it can make sense to put more into pension to get under £100k). That "60% marginal rate" situation does not apply to you.

Because you are already well above that zone, £30k ish in additional earnings gets you £16k in additional take-home so it would be crazy to do any of the things you suggest that would reduce your income by more than this just to get that £16k of support.

What the wealthy parents don't seem to understand is that very few people with an income over about £60k really need any of this support, and they are already perfectly capable of raising their families in ease and comfort if they simply balance their lifestyle according to their means. The threshold is set so high as it is to ensure that the unusual circumstances of outliers whose situation is trickier do not get accidentally excluded and to keep the administration simple and accessible because identifying the specific individuals who might need support without blanket rules like this would have a knock-on effect of excluding some of the very poorest and most vulnerable.

You are whining about the design flaws in your diamond shoes and it's not a good look. Yes some people's diamond shoes are nicer than yours. Live with it.

@JoyousEagle - those in my office do not put into their pension, they maximise the ISAs for all family members and then self invest. What is the point of tying up your money in a pension that you cannot access until later and that you have to pay tax on eventually? So no, nobody putting into pension. Using normal investment routes once ISAs maximised and I suppose at that level of income, you would seek a Financial Advisor, mostly. Unless an investment professional yourself.

Funny how they have better health care systems and outcomes, less crime, better rehabilitation, better mental health, better education, and a better skilled workforce, isn't it? But sure, let's have a miserable society in the UK... As long as the rich stay rich. Great stuff.

The young high earners without housing wealth are going abroad to save up for a deposit and save on tax. The older ones who already have a house and savings just put up with the taxes. Being able to afford to pay these levels of taxes is a luxury only the richest seem to be able to afford. For younger talented people with no family wealth they reassess and have to do what is right for them. I do not think any smart person just sits back and takes it willingly.

Yep!

This is why the people telling us they've no sympathy when nobody asked that anyway are so far in the wrong. We need tax, benefit and services systems that don't give people an incentive to work less.

@RatedDoingMagic Of course the 60% rate still applies to me - as I still have earnings in that bracket.

I also lose the childcare - which means I don’t earn anything at all between £100-140,000. Not a penny!

I end up with a ~70% tax rate on all earnings over £100,000 due to the loss of personal allowance and loss of childcare combined.

That is a very big incentive to find a way around the situation - everyone should be looking to make the best of their financial situation, and this is mine.

While I need to use childcare for so many hours a week, it is rational to find a solution which maximises my income (and as it turns out - reduces my hours by 20%).

Glad you've found something to work. Don't forget if you get your income under 100k you also become entitled to tax-free childcare - which is a free £2k off your childcare bill per year per child. So that's an extra £4k per year in your circumstances

What is also wrong is that taxation does not take into account cost of living, where you actually live.
If they still want children being born in London and living in London, then they will have to rethink the whole thing. Who can afford to buy a house costing a minimum of 900k even in the commuter belt and put 2 kids through nursery. Hardly anyone anymore and the tax system stops the last remaining ones standing. If they capital collapses, that then has a huge knock on effect for the rest of the country as the capital still produces the most taxes, by far.

OP just be slightly careful on the pensions. If you’re earning 200k or more then you have to start doing calculations with employer contributions added in - if that goes over 260k you start having your annual allowance of 60k for pensions tapered down and taxed on if you exceed. Can be an issue if say you get an unexpectedly big bonus at end of tax year. Although you can use carry forward. Anyway it is complex but worth checking on.

I know. As I said, I was being picky because you said "can't" put it into a pension. Sorry, I was being unnecessarily pernickety.

The other thing of course OP is that if your salary will increase significantly in the future and you get to the point where pension contributions are no longer tax efficient, whatsoever, then you should maximise what you can now anyway.

@Araminta1003 yes housing costs are very high, that is what most of our remaining income goes on.

I think pensions are considered risky as no one knows what will happen to the rules around them in future. Today with no limit on the value they seem more attractive - but, as you say you cannot access for many years (which does not help with the housing costs).

The difference in cost of living does not seem to be considered at all. No wonder there are so few children in London nowadays.

Everyone pays more tax in Scandinavian countries, at all levels. I think my calculated rates are actually above their top rates.

But - people can access the services equally there. I would still be able to use state nurseries and so on.

That seems a better system - I pay higher tax, but we all have access to equal childcare.

Having to pay high taxes towards it, but then not be able to use it doesn’t seem quite right.

@FrightHorizons - I am no expert, but I believe they are changing the rules around being able to leave your SIPP inheritance tax free to your DCs. So there is no point building up millions into your pension. But having a good safe nest egg whilst it is tax efficient to do so for you, is what I would go for.
However, the main point I am making to you is that once you are a high earner you need to financially plan very carefully and spend a reasonable amount of time doing so. A lot of people with young kids do not make time to do this.

Putting cash into pensions - the more risky thing is not investing those pension moneys wisely. The taxman playing around with rules for political gain is always going to be an issue, but not something you can control much. You can easily buy a variety of financial products yourself directly via SIPPS these days and ones that are very diversified and it is well worth getting up to scratch on that kind of thing.

100%. The problem in the Uk is that middle earners are taxed far less than equivalent countries and so the burden is increasingly being shouldered by a smaller percentage of higher earners. This causes the productivity issues we are currently experiencing.
but @DonnyBurrito isn't interested in facts 🤷‍♀️