>£100k salary and funded childcare

[UncleBunclesHouse]

I hope someone with a better grasp of all this can help as I’m terrible with numbers and tying myself in knots.

I earn £150k plus bonus comes to about 180

I am able to pay over the annual allowance into pension this tax year and next due to underpayment in recent years (mat leave/phased return etc) to bring my net taxable to under £100k

Youngest DC about to turn 3, if I do this I’ll get the 30 hours, will I also be entitled to tax free childcare??

Next point is that I haven’t been doing this so far, so would take decrease in pay to the tune of I think around £800 a month. I’m not sure if I can afford it, but I really want to do it because I think the offset of childcare funding would make up some of this.

Would really appreciate hearing from someone in a similar position, all I can find about this seems to be people in the early 100k range , for which it has very little impact on take home. Over £150k it seems to affect income more?

This is how it should be.

Trouble is when someone earning a very large wage, the question should not be how do I get more money from the state.

What is it you do @UncleBunclesHouse ?

You also have to remember the ‘free childcare hours’ rarely actually means that. My daughters nursery take off £400 for the 15 free hours (whether you are using it at 2 or it is an additional 15 on top of the standard 15 at 3 years) but you still have to pay )
£1500 ish because the days are a standard 10 hours with a 3 day per week minimum. it’s not worth it when you earn well into the £100k and have a bonus. My nursery have asked several times about letting them know what we see entitled to - the answer is nothing- so I just smile and nod.

there is no point in trying to get round it… personally I don’t think it’s fair. My salary is so low it’s not actually worth me working, as a teacher, because my husband earns more. It does not incentivise me to work!

Read it again. It says adjusted net income is calculated after deductions such as pensions.

I was in exactly the same position so know the rules inside out.

Did you not read all the articles about doctors keeping their salary below 100k to avoid this situation? One of the ways the government eased the cliff edge was to increase max pension contributions from 40k to 60k.

My advice on this thread is 100% accurate.

The last line of your quote covers it. If you pay pension contributions out of gross income so that it adjusts your net taxable income below £100k, you become eligible again.

At that salary you get nothing from the state.

If you make it too expensive for higher earners to have children they’ll work less. It is quite possible to end up with effective marginal rates of tax of over 100%. Who in their right mind will just grin and bear that. Would you work for nothing?

There will always be people who are envious of those of us who have the good fortune to earn high salaries and have to arrange their tax affairs efficiently.

I no longer have childcare to worry about, but I keep my taxable income below £100k through pension contributions because otherwise I am losing over 60% of that income to the state. I will have enough saved by age 57 to retire as soon as I can start drawing from it.

I am well aware that I pay more in tax each year than a lot of people's gross salary. It's a position of privilege, but I am also legally allowed to make my hard work benefit me as far as I can.

I read that if you earn 99.9k you have to be earning 136k before it's worth a pay rise. So at 150k you might be worse off each month but at least you have more in your pension

I would only bother if you had more than one child of nursery age

Why shouldn't op get childcare that her taxes pay for

I’m not sure I completely understand what you are asking OP. Are you asking whether it is worth it, or whether you can afford it?

My suggestion - it will certainly be better for the longer term for you to pay into pension to reduce to below the £100k … but it depends on whether that leaves you with a cash flow problem for the next couple of years

What I would suggest is to make up a spreadsheet with the figures, but for each year over a 10 year period. Do one version where you pay into pension, and one where you don’t. Use a take home pay calculator. Remember to take into account that the pension is an asset. It’s literally money in the bank that you just can’t access yet. A surprising number of people forget to take that into account.

You might also find you get more productive answers on MSE where there is a more mixed crowd. Generally men tend to support each other in earning high incomes, whereas women seem to take offence.

Tax efficiency is one thing but I am actually flabbergasted that someone is able to earn that much money and yet be unable to do the relatively simple maths on whether sacrificing a chunk of salary that is far larger than the average take home into pension is worth it for getting a small amount of money back through childcare fees. i can totally see the point if you’re a little way over £100k, but you’re approaching double the threshold so it almost certainly isn’t worth it. Just pay the nursery bill, on your salary nursery isn’t that expensive, and if you can afford to lose the additional salary right now by putting it to pension then you can definitely afford the nursery bill.

And I say that as someone from a household where we were not eligible for 30 hours or tax free childcare.

Btw it's not 20% off all nursery fees - it's only £500 towards them every 3 months

You need a spreadsheet OP. I'm in the 62% tax trap - for us the free hours are totally free and the top up is minimal (£100 a term or something) as we use a not for profit childcare setting. Over £99,999 to something like £135k I am actually worse off if I don't sacrifice into my pension.

I look at it another way - by overpaying into my pension (and i am still only putting in a total contribution of about 20% as my employer doesn't match) I am ensuring that I am not a burden on the state in my old age. In fact, I will probably pay tax on my pension.

But these cliff edges shouldn't exist - its the loss of personal allowance together with loss of childcare support that creates a peverse situation where you are better off working less.

If you can manage your lifestyle on around £5,400 a month take home I would sacrifice down.

Whereas the cliff edge nature of the cut off means anyone who earns over £100k needs to earn £150k to have the same net income of someone earning £99k. It means those earning between £100k to £150k are worse off than those under the threshold and getting the childcare support from the government.

As someone who is no where near earning enough to be means tested out of the funded hours, I always think it's ridiculous on threads like this when people swarm in to insist that anyone who earns more than them shouldn't be allowed to discuss finances or tax planning because it's allegedly "tone deaf" to manage your finances if you earn more than an average wage.

Your tax payments will cover the funded hours provisions for probably another dozen families, and the cliff edge loss of the entitlement at £100k is a messy and counterproductive piece of policy that forces high earning parents of nursery aged children to either reduce their working hours or overpay into their pensions to avoid an effective marginal tax rate well in excess of 100% between £99.9k and £134.5k. I think people often don't understand that earning over £100k can make you (in some cases significantly) worse off than earning under £100k.

In your case OP it really depends how much utility you would get from the additional take home pay currently. If you can comfortably keep up your lifestyle on your residual income after sacrificing below £100k then it is the most tax efficient option while your child is at nursery, but if it will make it difficult to maintain your lifestyle/ keep up with your financial commitments then you would likely be better off just taking the nursery fees hit for the sake of the higher take home pay now.

You do realise that it is the higher earners whose taxes fund everyone else. If they are faced with effective marginal rates of around 100% they won’t do that work which in turn removes funding for lower earners.

Whether you like it or not the fact remains that the economy needs to incentivise higher earners. Tax receipts follow a laffer curve distribution meaning higher rates of tax don’t equate to more revenue for the Treasury.

There is no point incentivising higher earners if they are the type of person who will do their best to avoid paying taxes and try to grab money out of the state

They winge on about being hard done by

Probably winge even more if they get taken to a and e and see how bad it is

Many other countries manage to raise more taxes overall , higher tax rates , and have happier and healthier populations because having a social conscience is part of the culture

Op I think it all depends on whether you need the income. It would definitely be more tax efficient

@kelsaycobbles Just bringing my post to your attention, which explains precisely why those in that bracket might find ways to make things a bit more fair.

@Charlie2121 eh? What’s the tax rate for to do with anything? The point is that public support such as free childcare should go to those who need it. As a policy it is designed to support struggling working families and keep parents in work rather than giving up work because childcare is more than one of their incomes. It isn’t intended to enable very high earners to put more into their pension.

It might not be more tax efficient because on your salary with average stock market performance I would guess you're likely to hit the lifetime allowance on your pension. Also if there's any chance of a payrise or bonus then you might find yourself back over £100k again. Finally, if you use childcare all year round it's more like 11-12 hours funded, not 15 so it may reduce your bill less than you think.
Personally I don't think I'd bother.

The lifetime allowance has been removed.

Besides, OP is only likely to contribute at this level for a year or two - once the funded childcare years are over, she would cease the salary sacrifice at that level.

You miss the point. Higher earners will work less and pay less tax if the effective marginal rate is 100%. That tax is needed to fund others so everyone loses if there is no incentive to earn at certain levels. Would you work for nothing as that is what you are suggesting higher earners do for perhaps a day every week.