Tories campaigning to remove the childcare maximum income threshold

[FlakyPastries]

Kemi Badenoch has announced that the Tories want to remove the upper income threshold on childcare.

This means all working families will be able to claim it, including those earning over £100k.

Do you agree with this policy?

My baby’s nursery charges £30,000 and the free hours and tax free childcare is worth around £15,000 - so this is quite a significant benefit for those currently unable to claim.

Actual numbers (rounded). My taxable income is just a shade under £100k. Last year I paid around £30k in income tax and employees’ NI per my HMRC tax calculation. I also maxed out my pension contributions at £60k. If I had instead taken those pension contributions as earnings, I would have paid an additional £32k in tax. That would have made it £62k of income tax and NIC on earnings of £160k, just shy of 39% of my earnings. And I would have lost thousands in tax free childcare so my effective tax rate would one even higher.

Around 2 million workers are projected to earn over £100k in this tax year. I think that would earnings after pensions contributions and other deductions, as that’s the number that HMRC would see, but might be wrong.

https://www.rathbones.com/en-gb/wealth-management/media-centre/record-2-million-workers-earn-six-figures-new-financial-year-dragging-more-ps100000

Well, of course they don't have to. They can choose not to, but then they will pay more tax. Up to them, I guess.

I guess I come at it from the perspective of, why wouldn't they?

We are all super interested to know which $bn company you run, given that you would clearly have made far better decisions than every other large organisation during the global pandemic!

At the very least, you must have a senior level strategic role, which comes with a high salary. Do you try to stay under these thresholds or do you just push through it?

Because it is good for the children.

Either
A. the family is only temporarily non-working, e.g. due to recent redundancy, and will soon be working again. In which case it is better for the DC to stay in their current childcare and not have it disrupted and potentially lose their place
or
B. the family is long-term unemployed, which always suggests there are other big issues at play, so having the DC in childcare might be the best way to give them a good start in life that their parents can't provide.

So, you didn't actually pay 40% tax?

Maybe the BMA objecting to increasing the number of medical school places prevented the NHS from proper long term planning.

The issue is that there are multiple cliff edges at £100k, and the thresholds haven't risen in line with inflation so have many more people (that wouldn't consider themselves high earners) have been dragged into it.

The reduction in tax free allowance, so the 60-67.5% tax trap (yes its 67.5% for those living in Scotland), plus the loss of funded childcare hours and tax free childcare mean that it just isn't worth many people getting a pay rise to take them above £100k. And as a result some cut their hours, to reduce take home pay, and others throw money into a pension. Until earnings would be well above £130k (depending on number of younger children), it just isn't economically worth it to the individual to take anything in between as income.

So the important thing for those unaffected to understand is that there is an impact to the economy by people in this bracket reducing their take home earnings. They reduce their earnings to ensure they still claim the childcare, but have less money to spend, reducing potential income for small businesses, delaying larger purchases.

I think abolishing the threshold is too much. We don't need taxpayer funded childcare for those earning £1M plus a year. But it needs increasing, at least in line with how it would have risen with inflation, and likely a taper too.

Earnings increasing in line with inflation, to keep the equivalent standard of living, but then rising above a cliff edge that mean losing benefits with a gross impact of a £20-30k pay cut does not work

But it’s not. See my screenshot below of a salary calculator at £125k. It’s almost 40%, and doesn’t include tax on company benefits or student loans. Captured in the stats are the net earnings - so the adjusted net earnings after people have dropped days, put into pension, bought holiday on salary sacrifice, put it into a salary sacrifice bike and car scheme etc. So the figures captured are those that aren’t adjusting their earnings below the £100k cliff edge. It’s forecast to hit almost 3 m earners within three years.

There’s a calculation done which suggests that scrapping the £100k cliff edge would earn up to £500 m in extra tax. And boost productivity. It seems strange not to just do that, and tax people’s earnings instead of letting them load it in a pension or work less hours/give up work

But this is the point… the behaviour is driven exclusively by the tax system.

People don’t want to have to put every penny they earn over £100k into pensions exclusively because the tax treatment at that level is so high.

People might prefer to spend that money on living now. I think for many in those kinds of roles the ambition is enjoying the lifestyle now, not just having a fixed income year after year, and having a nice retirement.

That is nothing to do with childcare costs though as the consultants on that salary won't usually have preschool age children. I would agree that taking away the personal allowance for those earning over 100k should be looked at again and the threshold raised but the Torys aren't suggesting that and they didn't do it in the 14 years they were in power.

Someone who earns £160,000 pays exactly 40% tax

FFS. Do you have any idea how long it takes to train a consultant surgeon? Or how much it takes in terms of senior resource to train and supervise them until they’re fully qualified? Do you think that can be done in a few weeks when the government announces surprise tax changes in a Budget? Or even a few years? You’re taking like you can just stick an advert on LinkedIn and get a few hundred people in next week. 🤣

NHS workforce planning operates over decades. It has to. You’ve seen the scandal around junior doctors not being able to gain training positions because student numbers were increased but there weren’t enough senior staff to supervise them in training positions, right? Tax policy changes are typically considered over the lifetime of the current parliament, if we’re lucky. In some cases they’re barely looking forward more than a few months. That’s because chancellors don’t want to announce changes that will give them the political pressure but give the benefit to the next guy in the job, who might be from a different party. That’s ultimately why there is so much discussion about how an annual budget event is dysfunctional and creates problems in the wider economy.

I know several doctors with preschool aged children doing this.

All of the doctors I know with preschool age children work part time.

No, because I made damn sure I didn’t. Which is rather the problem. If not for the cliff edges I would have had more income to spend in the economy and paid more tax. I’m not complaining, it incentivised me to put a lot more in my pension than I would have otherwise done and now I’m looking at a very comfortable early retirement. So good for me, not so good for public finances or the economy. Someone mentioned upthread that scrapping the thresholds would raise around £500m more in tax so the numbers, while not huge, aren’t exactly tiny.

You pay 40% tax on all income over £50,271, not 40% tax on everything you earn.

As an aside, as not many people know this, but that is only until you hit £100k, and then you lose £1 of your Tax-free Personal Allowance for every £2 you make until £125k, which is essentially a 60% tax band.

Exactly, and by not taking the income now and having less money to spend, as prices go up its the 'nice to have' things that fall away.

Like meals out, coffees out, maybe tipping a bit less, buying less things, or finding cheaper alternatives. So it is restaurants, hospitality, small businesses including shops etc that often lose out disproportionately. Having a real impact on everyone if jobs go and businesses close.

The material point is, you didn't have to pay 40% tax.

Except in Scotland, where it is 42% over £43,663, 45% over £75k and effectively 67.5% between £100k and £125,140......

And no funded childcare until age 3, when its the same 30 hours term time for all. Same £100k tax free childcare cliff edge though.

I'm not in the top brackets, but it is a big difference from England!

Yes, I understand how the tax system works, but that wasn't the point I was making.

My DH's haematologist has pre-school aged children and only works 2/3 days per week. She wears a "consultant" lanyard, so presumably is consultant grade rather than registrar (or whatever they call the less experienced specialists these days).

I’m not really clear why you are denying it is possibly to pay 40% of your income in tax, when it is?

I haven't denied that at all?

I have merely said that, in practice, people have to be earning a heck of a lot more than £100k to fall into that category.

And so what if they do earn a lot more than £100k?

In any case - it’s the 62% rate between £100-125k (where around 50% of £100k+ earners sit) which causes the main distortions due to behaviour change.

The effective rate on your next pound of earnings has a bigger impact on behaviour than the overall sum.

That is why the removal of the childcare allowance at the same time as the personal allowance is so catastrophic - it means after £100k you might not be any better off until your earn £140k.

My husband is 38 and is a 4th year consultant doing 12 p.a. I can assure you it is an issue for us too!

Yes, I understand what you mean about having to earn a lot more than £100k (what was it, £160k?) to pay a total of 40% in income tax, but what does that have to do with anything?