Reducing salary below £100k

[stellarnova]

Fab timing - in labour with DC2 and get the dreaded HMRC notification that DH's taxable income is expected to go over £100k this year so our tax free childcare has been stopped with immediate effect 🫠 We'd been planning to sort this slightly later in the tax year - didn't realise they would stop it so soon.

DH is already salary sacrificing the maximum his company will allow, and has a few gift aid donations lined up. He was also thinking of making additional lump sum payments into his pension. The latter is something neither of us is that familiar with. Sorry for my ignorance but how do you go about it, and is it the solution here? Are there any restrictions/issues other than that there's a £60k limit for contributions each year? Thanks in advance for your wisdom!

It’s 100% of earnings with £60k in this tax year and if available, you can carry forward from the previous 3 tax years. It doesn’t need to go into your workplace pension.

Can he buy holidays? Does his work offer a sharesave or a share incentive plan?

Have you worked out if it’s worth him sacrificing so much of his earnings? The savings on childcare can’t be that much that he’s sacrificing nearly £60k a year. My DH earns above £100k but after doing the sums it wasn’t worth sacrificing and we’re happy to pay the tax.

Would it be possible for him to work 4.5 days or 9-day fortnights and spend more time with the DC?

But in terms of paying extra into his workplace pension, usually there are details on their website as to how to do that, doesn’t have to be through the employer for mine,

She said it was the most salary sacrifice his company would allow, not that it was nearly £60k.

Could he take some unpaid parental leave to bring down his pay?

Are you sure you’re doing your sums right?

If you are accepting the money above 100k you are straight away paying 60% tax + NI on the next 25k of earnings. If you have student loans that increases to 71% in total.

That leaves you with £7250 more take home pay on 125k than 100k. If you are using nursery you also lose 30 funded hours and access to tax free childcare. That will take account for all of the £7250 meaning your marginal tax rate is 100%.

You need to earn well over 130k before you are better off than earning 99.9k if you have nursery age children.

There is almost no scenario where not salary sacrificing any salary between 100k-159.9k down to 99.9k makes any financial sense if you have nursery age children. Failing to do so is literally accepting 100% marginal tax rate on a significant portion of your income.

OP the 60k limit is the total of both his contributions and his company contributions. You say he’s currently using salary sacrifice- is this a percentage of his salary into his pension? What percentage / value does the company contribute?

This - my DH earns £150k, I earn about £100k and we salary sacrifice because we have two DC in childcare and it still works out better financially to salary sacrifice.

If you salary sacrifice under 100k you can also claim tax-free childcare for each child on top of the funded hours - which is worth £2k a year per child.

I can’t believe anybody is happy to pay 62% tax and lose free childcare.

This doesnt make sense to me.
DH is already salary sacrificing the maximum his company will allow, and has a few gift aid donations lined up. He was also thinking of making additional lump sum payments into his pension.
Can you clarify: is he already paying in the full 60K? If thry wont let him pay 60k in (weird!) He needs a SIPP ASAP.....

If he is and still over....
If he didnt use the full 60k in the previous 3 years taxes then his full allowance is be higher than 60k this year)

https://www.gov.uk/guidance/check-if-you-have-unused-annual-allowances-on-your-pension-savings

Which would be a very easy fix for you.

Child in a setting that takes the funded hours. Not simply a nursery aged child. Lots of places don’t take the funded hours so the calculations become different.

Also cycle to work is often a salary sacrifice. If you’re in a city where bike commuting is an option for you or the kids (cargo bike, not saying that a small child should cycle) you could think about that.

As long as he's not going to go over 160k and can put the 60k in a pension at some point (or more if he has carry forward to use), he can go into the hmrc app and just set his expected annual income to 99999. Sort a Sipp or lump sum payment into existing pension out later.

Edited to add company contributions also count towards the 60k, so take those off too. So if he gets 10k in company contribs, as long as his income is less than 150k, he can avoid the 100k cliff edge.

Thanks very much, all - sorry, that was a bit of a brain dump! Just wanted to make sure I hadn't left anything out that might be relevant.

Re salary sacrifice, his company has a percentage cap and at that cap he still needs to get it down further. He's also bought some annual leave.

The bit we both know very little about is lump sum payments but very reassuring if there aren't any restrictions on those as such, other than the £60k cap (which can roll over, and he won't reach at the moment anyway).

Now just to work out whether HMRC need the additional payment to be made now in order for them to reinstate the childcare payments, or just for us to say that that's the plan? The letter says we need evidence if we're going to appeal it. Seems a bit harsh if we have to make the payment now rather than later on in the tax year when more variables are clear.