Childcare funding help - £100k threshold

[NotMyFirstCrisis]

I firstly want to acknowledge that I know I am in a very privileged position, and I probably should have thought about this more before returning from mat leave, but… mum brain!

Name change for this, I earn £110k base plus £30k commission (which is obviously dependent on sales) and need help with the 30 hours free childcare funding.

I started back at work in May, and we received funding from September as I’m putting money into my pension via work (salary sacrifice). However, that isn’t enough, so I need to put more into my SIP to bridge the gap and get my adjusted net income below £99k.

I need to put £40k into my pension. £12k goes into my workplace pension via salary sacrifice, so I need to put another £32k into my SIP.

Obviously, my bonus/commission is taxed at source, and I don’t receive the full amount in my bank account. I’ve realised I’ll only be able to save around £16k, meaning I’m £16k short because the rest has gone to the taxman.

How do people manage this? I don’t have enough savings, as they were used during my mat leave, and I can’t put any more into my workplace pension. I don’t think I can actually get below £99k, which is frustrating.

Will I need to pay back the funded childcare hours and Tax-Free Childcare from this term? I gave them verbal confirmation, and I genuinely thought I’d be able to make it work.

As I said, I understand this is a very privileged conundrum. I just want to get ahead of it, as my childcare costs will go from £800 a month to £2,100 a month. (Blooming London!)

Does anyone have any experience with this?

Thank you!

Well quite. I agree re the cliff edge should go!

I was responding to @Marycontrarygarden saying the OP’s salary isn’t high by her standard which of course she’s entitled to say, but factually the OP is in the top 4% of earners in the UK, so by factual standards is on a high salary. I don’t get it when people breezily say oh it’s not that much really.

I think the issue here is that although it is a high salary, in terms of household income it isn’t. 2 people earning 50k each have a much higher income because they pay less tax over all. The tax system is very discriminatory to single parent families.

I agree @Negroany most employers don’t want people chopping and changing their contributions all the time, and they can set their own rules for the scheme.

Most lawyers would tell employers they need to continue the pension contribution, but that’s partly because they don’t want to be on the hook for giving advice that goes against the consensus and turns out to be wrong! If an employer decided to do the opposite and fight it in court, it isn’t certain that the employee would win (but which employer is going to risk it?).

My own employer (large law firm) made me (and others) opt out of salary sacrifice entirely when on Mat Leave, it hadn’t even occurred to me that was wrong until I was sat in some training from the employment team which said employer pension contributions must continue, including Sal sac! They eventually repaid the missing amounts, but not quickly!

If it was possible to get your post-pension taxable Gross down to £99,000 then after tax and NI your take home would be £67,977.40 and you'd pay £800pm (£9,600pa) childcare, leaving you £58,378pa for other living costs.

If you stop trying to avoid this and just put £12,000 into pension, your taxable income is £128,000 so after tax and NI you take home £ 79,626.40 and pay £25,200 for childcare leaving you £54,426 for other living costs.

That difference is £320 per month. Although I do understand that will hurt a bit, it's the difference between £4,865 take home per month and £4,535 take home per month - it's only a 6% difference and I'm not convinced that it's worth all this shenanigans for the sake of a couple of years. This level of difference is "in the noise" - no one should be aiming for a level of lifestyle affluence that requires 100% of their take-home pay. It's always easy to allow your expectations to grow beyond what is manageable on your income but sensible stewardship aims to commit no more than 85%-90% of your take-home for normal expenses and then if there's a couple of expensive years (like in the few years before your child reaches school age) you have the flex to absorb it. If you can't absorb an extra 6% of costs for a few years you have chosen a more affluent lifestyle level than you can afford and you need to downgrade your expectations - cancel the gym membership and subscription services, move to a smaller home, there's got to be savings you can make because plenty of families do just fine on take-home pay well below £4,535 per month.

@KindlySurfiingPlatypus Kindly, my question wasn’t ’should I’ it was ‘how do other high earners do this’ as I was a little stumped. I have now been given advice that I can look into with an accountant.

As I have said previously, I can and will manage either way, however it would be ill advised for me not to adjust my income if I can.

And yes, some of my living costs are not what I would have chosen as a lone parent on one salary (although trust me, I have no time for a gym membership), however this is where I am at and I have to make do for now. I am trying to ensure I give myself and may daughter the best start in life that I can, as I am sure most parents would do in my situation.

I do appreciate you taking the time to write such a detailed reply though, knowing the difference is less than I thought is helpful and does settle this flustered mums mind a little and something I will go through with a professional.

@KindlySurfiingPlatypus Also, after looking it over, as my bonus fluctuates monthly (it is based on sales it is not guaranteed), some months I just get base pay so I unfortunately don’t think the maths you have given reflects my specific situation. Again, I obviously need to speak to a professional regarding this going forward.

hmm, what might you have missed in your little lecture here?

The extra £29,000 that’s gone into the pension which help OP to actually retire at some stage.

Pay into a private pension - get some standard financial planning advice and they will be able to sort it out and make sure you get all the relevant tax relief

I'm surprised to hear your employer caps the amount you are allowed to salary sacrifice when not on maternity. Is this something you can push more on and get the 15% up even more? There is only a benefit to them if you do it as they save on NI payments (until APril 2029) . Employer's NI is 15%, so for every £10k you sacrifice they save £1500.

If you point that out to them they might let you do more.

That changes in April 2029 but hopefully your daughter will be out of nursery by then.

Pension contributions paid after salary will unfortunately not keep your earnings below the £100k threshold. Therefore, although you will still be able to claim 40% back on your SIPP contributions, you will still lose the childcare benefit.

You don't need an accountant to do the calculation. ChatGPT will do it for you, then double check it with another AI to ensure the answer is the same.

I asked it how much you need to sacrifice from now on, assuming you've been sacrificing 10% per month so far this year. It thinks you need to increase your sacrifice to 45% and possibly make an extra sacrifice in March, depending on what your actual commission and bonus is.

Here's teh link to the questions I asked. Obviously I had to make some big assumptions as I don't know you ;-) But this gives you a starting point, and you'll save a fortune on accountancy fees!

https://chatgpt.com/share/6ad6a165-3740-83ed-8e13-1c77b6ed227e

PS: You can open a Junior SIPP, but only 20% tax relief is given, no matter what your tax bracket is.
Bear in mind your daughter won't be able to access it until she's, well, over 57 for sure!

You should first look at a Junior S&S ISA for her - this will give her a really good house deposit or pay uni fees when she's a young adult. Then when that is secure think about a pension for her.

We have a pension for our 13yo. It has £8k in it now, and we won't put more in it. however, when he is earning his own money, it will be very easy for him to put more money in without the barrier of being scared to invest or decision paralysis of what where and how much to put in! Even if he doesn't put a penny in, that £8k will compound up to around £120,000 in his late 50s, based on 6% growth.

Actually pension contributions after salary DO reduce your “adjusted net income” for the calculation. Eg most employers will allow contributions as salary sacrifice or as net deduction (which still save tax, just not NI) and both reduce the relevant income for the £100k check.
additionally putting money into a SIPP will do the same. Pension contributions do not have to be salary sacrifice to count. (Helpful for when salx is limited from April 2029).

source: https://www.gov.uk/guidance/adjusted-net-income

Ooh that's good to know thanks.

So the OP doesn't have to convince HR to allow more salary sacrifice (although beneficial to her and employer) but can just make a payment into her pension in march to bring her salary down to below £100k.

Again ChatGPT can do that calculation without paying for an accountant

How about taking unpaid parental leave and spreading it out so you can pay less nursery in school holidays? This would reduce your gross salary..

OP is also a single parent. Her nursery fees without the free hours are over £2K and she presumably also has a significant mortgage or rent to pay by herself as she lives in London. That doesn’t leave loads to live on each month.

All this while she is working in a probably pretty full-on job (to earn so much) and adjusting to life with a baby as a single parent. It is perfectly legitimate for her to look for legal ways to minimise her tax bill. I suspect she is already paying plenty more than many on this thread.

Thank you everyone for your thoughtful and kind responses.

After running the numbers last night I have decided to see if I can drop to 4 days from Jan (I need to give 2 months notice to nursery to drop a day for her anyway), which genuinely wasn't on my radar before I made this post!

I had avoided even considering it, as suddenly being the sole earner has made me quite risk adverse to anything that may affect my career. However, if I up my sal sac pension to 15% (and including the contributions I have already put into my SIP), it actually looks like it's the simplest way to stay below the threshold and will give me an extra day with my little one since they won't do AVC.

I have a meeting at the end of the day to discuss, and hopefully it won't be too disruptive for my team. Fortunately, my workplace have been unbelievably supportive over the last 18 months so I am feeling hopeful!

Finger crossed.

Thank you for all the junior pension info too, I will speak to my financial advisor about it, I am pretty sure it was a junior ISA that was set up (it's a blur to be honest as I was on autopilot at that point so I will check).

But you get the tax back on it when you put it in your private pension? You get basic rate tax back automatically and then you apply to get the higher rate back. So you’re paying the tax in your salary but getting it back when you put that money into a private pension

I’m no Conservative but I agree with Kemi Badenoch on this one. I hope you get it sorted.

Just a word of warning, if you’re going to drop your income by paying huge amounts into a pension, then watch out for the annual allowance tax

I think the concern was about the cash flow timing.

@NotMyFirstCrisis I know your thinking has moved on, but to let you know that you can ask HMRC to adjust your tax code to reflect your expected SIPP contributions, so you benefit through lower PAYE deductions rather than waiting for a year-end refund.