Childcare benefits / earning over £100k / pension contributions

[bakingmummy21]

We have 3DC one of whom is under school age and is currently getting 15 free hours, which would increase to 30 in sept. He goes to school in Sept 26. I manage my income to pay into my pension and stay under the £100k threshold. DH earns under £100k anyway. My pension contributions are around 15% on top of the 10% my company puts in. Last year I paid two thirds of my bonus into my pension.

I have just been told my bonus amount for this year which is more than expected. To stay under £100k and keep our childcare benefits I would need to put it into my pension, and increase my ongoing pension contributions to 20%+.

If I take my bonus I would be taxed at full rate and lose all my personal allowance - but I would still get paid a good amount after tax. Going forward I could then slightly reduce my pension contributions and have slightly more money each month (whilst still paying a decent amount into my pension). However our net childcare cost increase for the next 12 months would be around £5k total I think (need to double check this) as a result of losing the free hours / not getting 30 free hours come sept.

Obviously logically it makes sense to max out the pension and keep the childcare benefits for the next year - but this will restrict us in creating savings outside of pension and for our children. We also have some credit card debt which is on 0% for the next 2 years which I am slogging through paying off and after this plus big mortgage etc. there’s not much left for additional savings at the moment. This will obvs change once DC are all in school and CC debt is paid off.

WWYD?!

Does your DH pay any excess into his pension beyond where the employer matches? If so, it may be more beneficial as a couple for him to lower contributions and have you contribute more. He can then pay more into CC/savings while keeping you under the £100k.

Good point, but no he doesn’t really. He gets the minimum amount contributions and wouldn’t want to go any lower there. But actually this is a good way to look at it in future as we’re aware my pension will likely be bigger than his.

Hi,
Sorry I am new to mumsnet but after searching the internet for a similar question I have come across this so I hope you don't mind me picking your brains.

I am a mum of 3 young girls, 2 of which are still in nursery. My DH earns over 100k, and as a result, don't receive any free hours, or tax free childcare.

A couple of people have mentioned paying more into a pension scheme to bring him under the threshold so we get some help (especially with nursery increases to £75 per day!!). He doesn't think this is possible due to it not effecting what he's actually earning. It looks however you've been able to do it @bakingmummy21 with your bonus? Would you mind giving me some more information if I have got this right. I'm looking at a new job but weighing up to see if its possible especially as the youngest won't be going to school until September 2028!

TIA x

https://www.pensionbee.com/uk/blog/2024/august/how-parents-use-pensions-to-avoid-tax-traps

you can take the gross pension contribution off your earnings to get to ‘taxable income’

Yes it’s possible - any pension contributions made through payroll (eg as salary sacrifice) reduce taxable pay, I do it to get under £100k.

here is the description from HMRC

What adjusted net income isAdjusted net income is total taxable income before any Personal Allowances and less certain tax reliefs, for example:

• trading losses
• donations made to charities through Gift Aid — taking off the ‘grossed-up’ gift-aid amount
• pension contributions paid gross (before tax relief)
• pension contributions where your pension provider has already given you tax relief at the basic rate — take off the ‘grossed-up’ amount

@bakingmummy21 you may find it makes sense to cluster pension contributions to every other year.

eg if you earn 160k and want to put 35k per year into a pension, you’d be better off paying zero one year (unless you’d miss out on employer matching) and 70k the next and so on than doing all in one year… or a variation whereby you maximise pension until after preschool years are done then do the opposite

Currently the maximum is £60k into pensions per tax year to obtain the tax relief.

Why would 'clustering pensions' help at all?

Keep under the 100k threshold. Have you considered cutting your hours going forward to keep under it? I do a combo of pension, pt and unpaid parental leave to keep under the 100k.

Its not actually motivated by the 100k cliff as my partner earns over 100k too so we don’t qualify for the free hours etc but I worked out that earning anymore actually doesn’t make me any happier and kept me away from my daughter too much (previous C level with high base and high bonuses and though it paid well I didn’t see my kid enough)

The 100k threshold has done wonders for my work life balance and mental health! It all goes out of the window from April though as my equity starts to vest….

Exactly what I was going to say

Because you can use the unused allowance form the previous year so

Yr 1 - 5k
Yr 2 - 65k
Yr 3 - 40k
yr 4 - 130k

@Marmight the annual allowance is £60k per year but you can carry forward 3 years of unused allowances - so this wouldn’t incur a tax charge.

even without the childcare issue it is worth it at specific income levels because of the different tax bands. The tax rate on earnings of 100-125k is 60%. So if you earn 125 each year as you would in my example you’d pay 60% tax on 25k per year, so you would be taxed at 60% on 50k of income over the two years.

if you were paid 160k one year and 90k the next (after pension contributions) you’d only pay 60% tax on £25k total - the rest would be at 40 and 45%

you'd have the same pension contribution off 70k either way, but more net pay if you pay less tax

@PosiePerkinPootleFlump

Thanks for explaining so clearly 😊

Yes it’s definitely possible and it’s well published. It’s the net adjusted income of £100k which matters. I can do pension on a salary sacrifice through my work which automatically reduces it but my DH has done this by paying a lump sum into his personal pension and then getting a statement to prove to hmrc / the tax childcare team. A bit more complicated but completely possible and you still get the tax relief on it just not through payroll if that makes sense. Honestly initially you don’t think it could make such a difference but it makes so much sense. The free hours and tax free childcare add up to a lot especially if it’s for more than one child and then you consider that you’re not getting taxed on what goes into your pension.

Thanks this is quite interesting - so at the moment I have decided to pay into the pension and keep the childcare benefits. But I will definitely look into this for future years!

@Northerngirlmum this was meant as a reply to your post!

Thanks I have done for this year. Ironically I was 4 days a week but didn’t earn enough for this to be issue (even if I was full time). I then went full time and subsequently got promoted. I was doing holiday buy too on a salary sacrifice but then my work very generously gifted me some extra days this year so I’m not doing that now. Having spent considerable time looking into it I figure now is just the time to load up the pension a bit and we’ll enjoy the benefits of a bit more disposable income sometime in the future…

I read this thread straight after a couple on the approaching welfare cuts. Many suggestions on those re high earners paying into the pot to help those who are less able to work and dependent on benefits. If I've understood this thread correctly (and apologies if I've missed the point), this is a couple earning in excess of £100k each looking for advice to retain their free childcare?? I wonder what the suggestions would be if it was moved to AIBU?

Would you pay to work?

No. Thought not.

This is the reality of the £100k limit. It’s a cliff edge.

My tax bill last year was £154,300. Those of us with ‘broad shoulders’ are tempted to stop
working THAT would be worse. Tax disincentives are real.

I get your point but how does taking free childcare fit in? Surely if you can afford it on £200k, the decent thing would be to pay for it? I'm happy to have my view changed though with a respectful discussion (as this isn't AIBU!)

It’s a cliff edge so if you earn £101k you can lose £10k childcare support per child.
with 2 children you need to be earning £125k before you’re in the same position as someone earning £99k.
That means someone earning £110k is worse off and the “paying to work” as mentioned springs to mind. There is also a 60% marginal rate at this level.
Its different for someone earning £200k but if you’re in that £100-125 bracket this is a highly sensible discussion, morality doesn’t come into it when additional decisions like saving more into a pension or working fewer hours can mean you are literally better off every single month.

a tax system that disincentivises people to work is a tax system which needs to be reviewed - but won’t due to the argument that those earning over £100k “don’t deserve it”
(an argument we don’t apply to any other public services, inc education - reframe childcare as early years education and the argument becomes even weaker)

Unless I’ve read it wrong I am the only posted with both people in our household earning over 100k and as stated we don’t get any childcare benefits due to this.

Am I not allowed to take time off to spend with my daughter to keep me under the threshold @Lifestooshort71 ? Spending time with my child is doing the right thing for her. Ironically working rather than staying home with her when she was little which has enabled me to earn this much was also judged on her at the time for putting my career first.

It’s so interesting as clearly we can’t win can we.

i think it’s the issue of losing your personal allowance - 60% marginal tax rate.

Then you lose childcare on top and it’s £1 over and can cost 1000’s. It makes people feel like working isn’t worth it, and to be honest, it’s not in that situation. If we disincentivise people they never push on to higher levels and productivity falls.

If you look at the tax burden, the amount paid by those workers is huge, it’s a small incentive and frankly we need women to work, it usually women that stop and do I think it’s wrong to remove what is effectively a small benefit.

I didn't say those earning over £100k 'don't deserve it'. I suppose I'm struggling to accept the mindset that looks for ways to be able to claim it. My views are unimportant (not being snarky!) as I can't even imagine being in that position but I do agree that there comes a point where you're disincentivised to work more - perhaps Starmer should be looking at that as well as the other end of the scale?

(Oh, and to the pp who jumped in and said would I work for nothing....I do 2 shifts a week in a charity shop.)

I genuinely wasn’t quoting you - but sorry I know I used quote marks! - it’s just a very common argument. I don’t participate in AIBU and think this is a valuable discussion.

they do need to look at it.. but they won’t as it’s not popular.
putting more money into a pension or not working overall reduces tax take which is quite a mad policy when you think about it. Universality of this provision as is the case for virtually all other services would make sense to me.

Yes and i also volunteer and sit on the board of a charity, but that is not the same as the exchange of my time and labour for paid work that then turns out to cost me money.