30 hours free childcare, tax free childcare, the £100k limit and bonuses!

[MoralBeryl]

I'm spending a happy Mother's Day trying to figure out our childcare options. Goodness knows why I thought this was a good idea!

This tax year (17/18), DH's taxable income will be around the £100k mark. Could be up to £1,000 under or £1,000 over.

In 2018/19 (so the tax year in which we hope to start getting 30 free hours for DD1 and will have to make a decision on vouchers v tax free childcare), we can increase DH's pension contributions to hopefully keep below £100k.

The challenge is that his bonus could be anywhere between nothing and £24k, dependant mostly on company performance. This year it is likely to be £6k (the biggest ever). It's paid at the end of this month.

We're thinking of offsetting a potential £12k bonus with increased pension contributions. It will impact on our disposable income, but getting the extra 15 hours free for DD1 will go some way to balancing that out.

What happens though, if we claim 30 hours free (and potentially tax fee childcare) and then he gets an unexpectedly large bonus?

We can't afford to offset the whole £24k.

What happens though, if we claim 30 hours free (and potentially tax fee childcare) and then he gets an unexpectedly large bonus?

Then you pay for you own childcare. Do you really think it is morally ok to find a loophole to ensure low income tax payers subsidise your childcare costs?

No. I don't.

Let's be clear here, if his salary before bonus was more than £100,000 then I wouldn't claim anything.

The thing is, it might be and it might not be. We just won't know at the point we'd need to claim, because it's the bonus that pushes him over.

I could potentially not claim for something I am both morally and legally entitled to, at the cost of 1000s of pounds to my family.

The question really, is how would we go about paying back what we're not entitled to. How would that work?

OP is there a back story here? You must have very significant outgoings if paying back the extra would put so much strain on your finances in your situation.

Won't he be told his bonus payment in advance of the payment being made? So you can decide if a bonus of x amount will push you over the limit, then pay any amount of x and above into true pension. My company gave us fair warning of the bonus amount and when we had to decide if we were to make addition pension contributions with it.

Is your DH paye? If so, my understandimg is it would be recouped via PAYE

If he is self-employed, it would be via his tax return

Are you already in a voucher scheme? If not, they close in April, so only ‘choice’ will be tax free.

We have had to think about this. The wording on the declaration is whether you ‘expect to earn’ more than 100k this tax year. You have to redeclare every few months. Until your husband knows what his bonus payment will be you cannot say that you expect his income to be over 100k, as the amount is discretionary. So once you know the bonus amount, and if it pushes his income over 100k, at the next declaration date you say yes and your entitlement will come to an end after a grace period.

No backstory. We'd lose £1500 in childcare voucher benefit alone. We're not rolling in money to the point where that is insignificant. Paying back 15 hours x 39 weeks + any tax free benefit is rather a large sum of money!

No warning on the bonus! It's officially announced mid march and paid end of March!

Yes, already get childcare vouchers.

Thanks MummaGiles. That's helpful.

Thanks too Gobbo. Makes sense!

We have this issue. We just stick the excess in a pension so we don't lose the hours.

It's an arse but hey, it's a nice problem to have.

Alternatively how big is the company and do they have any alternative bonus options. Could he take it as holiday / in two chunks for example?

We have this issue. We just stick the excess in a pension so we don't lose the hours.

It's an arse but hey, it's a nice problem to have.

Alternatively how big is the company and do they have any alternative bonus options. Could he take some of it as holiday / in two chunks for example?

He's already maxed out what he can buy in holiday. Can't use bonus for that unfortunately.

He's wondering whether he could pay any bonus (or part thereof) into a personal pension scheme in the 20 days or so between receiving it and the end of the tax year. I'm not sure how plausible that is or how complex that would make his tax affairs. He's not exactly great at household paperwork!

Over £100k you loose your personal allowance and the childcare entitlement - it’s a MASSIVE marginal tax rate between £100 and £120.

If I was you, I would put anything above £100k into his pension until he is earning more than £120.

Yes, I agree Fluffy.

It's very difficult to achieve that though, when you get your bonus at the end of the tax year (with no notice of what it will be) and set your pension contributions for the year at the beginning! Unless the second pension thing is a feasible option, we're just going to have to guess and hope that we're close enough to be under £100k but not so much that we've compromised our standard of living unnecessarily in the meantime.

Very annoying, but a nice problem to have as a PP said.

Bugger just lost a long post.

In summary see an IFA, it'll be the best money you've ever spent. 60% marginal tax rate PLUS loss of childcare. You're nuts not to do this.

It's very easy to set up a SIPP. We've got one with YouInvest but can be done with a number of different platforms (the fee structure works on this one for us). It takes literally a few minutes to set it up and you could pay in money on the last day of the tax year. The platform then sorts out the base rate tax refund with HMRC. As your H is a higher rate tax payer, he'll need to fill out a tax return to recover the rest of the tax relief.

In terms of what then happens with this private pot, is that you need to choose what you want to invest the money in but there are thousands of funds and shares and all sorts to choose from. And the money can sit in the account for however long until you decide what to do with it ( but obv can't be withdrawn till retirement, but can be transferred elsewhere if you change your mind).

Alternatively, your husband could find out if he could top up his work pension (perhaps that would attract additional employer contribution).

@MyDcAreMarvel so you understand how taxes work? Either way, OP's husband will have paid tens of thousands in taxes this year so plenty to subsidise your sprogs' nursery fees.

Thanks dontcallmethat, that was our conclusion over dinner!

Sounds interesting JoJo, we’ll look into it. Thank you. I expect I’d end up doing the tax return on 31st January though .

He’s already receiving the maximum employer contribution, I made sure of that a few years ago. He’s going to see whether he can make any additional contributions beyond the percentage fixed at the beginning of the year though. That would be easier all round.

I’m glad I looked into this. Neither of us realised we’d quite reached the stage that we have financially.

You reconfirm on the system every 3 months whether you still meet the criteria or not.
No nurseries near us do the 30 so you're very lucky to be such high earners and get free 30 hours

The challenge is that his bonus could be anywhere between nothing and £24k

We can't afford to offset the whole £24k.

I am confused, if you cant afford to offset the full 24k if he is lucky to get that, what happens if this year, or next, he gets nothing? Surely unless it is a guaranteed minimum amount, which isn't the case for your DH, then a bonus is an extra and you therefore should be able to live without any of it?

He's wondering whether he could pay any bonus (or part thereof) into a personal pension scheme in the 20 days or so between receiving it and the end of the tax year

Where do you get 20 days from? You said he gets paid it at end of March, and the end of tax year is 5/4, so its 7 days this year, assuming he is paid on or around the 29th, the last working day this year.

But JoJo is correct, he can set up a SIPP with an online platform immediately and pay in the bonus then decide how to invest it at his leisure after the end of tax year.

If fact there is no reason why he cant actually set up the SIPP now, and put an opening payment in, £100 or so, followed by the bonus at end of March. That would be my suggestion.

It’s actually 12 days. I wasn’t 100% on his pay date, but I knew it was earlier than most.

We can live without the bonus, no problem. It just goes into our savings anyway. The issue is making sure that the bonus doesn’t take him over £100k in taxable income. We could pay enough in additional contributions pension contributions to keep him under 100k if his bonus was £12k. We can’t put more than that in and still live as we do, so if he got £24k, he’d be over the £100k limit.

This isn’t a problem with a SIPP, because there’s no guess work. It’s probably our best option.

Re the tax free childcare my understanding is that if you earn above £100k BEFORE any sal sac into pension etc then you are NOT eligible. If I’m wrong (anyone!) pls let me know. DH is in similar situation to your Dh and we are sticking with childcare vouchers.

Re bonus your DHs employer may run bonus sacrifice scheme. Better to sal sac bonus rather than stick in personal person for tax and ni savings. But may not fix the issues re tax free childcare re my point above. Not familiar with 30 hrs childcare rules are as we’re in sunny Scotland

I think you’re wrong mintbiscuit.

Either that or I’ve wasted a lot of time today

We might still stick with childcare vouchers anyway. It’s a gamble, as we’re better off on them in the long run, but might not be able to get them!

Here. Final post gives link to legislation and further explanation of ‘adjusted net income’.

It’s possible there’s an England/Scotland difference though.