Balancing career progression and family needs is a complex task, especially when it comes to navigating the income threshold for free childcare support. For people earning income nearing £100,000, this issue is particularly pertinent. Losing free childcare can be a substantial financial hit, making it essential to explore legal strategies to manage your earnings effectively.
How to plan savings for childrenNavigating the financial landscape as a high earner with young children can be a delicate balance. While it’s essential to make the most of available support systems, it’s equally important to approach this responsibly. Our values, are at the heart of Unividual’s financial planning strategies and we follow the principle of utilising tax thresholds effectively while being mindful of the broader societal context.
Balancing career progression and family needs is a complex task, especially when it comes to navigating the income threshold for free childcare support. If either parent earns £100,000, this issue becomes particularly pertinent. Losing free childcare can be a substantial financial hit, making it essential to explore legal strategies to manage your earnings effectively.
If you or your partner have adjusted net income above £100,000 you won’t be entitled to any of the extra free hours, only the 15 universal hours for 3-4-year-olds.
Working Example: This means that earning £1 over £100,000 can cost 15 hours of free childcare and up to £2,000 tax-free childcare per child. Even if you take the example of a 5% pay rise above £100,000 you need to factor in the loss of a Personal Allowance, where you could incur additional income tax and National Insurance contributions. The net effect of a £5,000 pay rise is an increase in take-home pay by ‘just’ £1,900, when you take in to account £3,100 that goes towards tax and NICs, and a rise in childcare costs by £6,799 (15 free hours plus 100% tax-free childcare allowance).
Since April 2024, more parents have been able to access funded childcare. This was announced by the Chancellor at the time in the Spring Budget 2023.Here is a reminder on what free childcare you might be able to access, which is between 15 and 30 hours of government-funded childcare a week. Here’s what you need to know:
15 hours a week: If your child is 9 months to 2 years old, you can get 15 hours a week of government-funded childcare. Applications for these hours can be made from when your child is 23 weeks old.
30 hours a week: Working parents or carers of children aged three to four in England are currently entitled to 30 hours of government-funded childcare a week. You can apply from when your child is 2 years and 36 weeks old. The childcare provider must be approved, informal providers such as grandparents don’t count, and the support stops when your child starts reception class.
From September 2024: 15 hours of government-funded childcare will be extended to all children from the age of 9 months.
From September 2025: Working parents of children under the age of five will be entitled to 30 hours of government-funded childcare a week.
15 hours for children aged 9 months to 2 years
You can apply from when your child is 23 weeks old. The application timing depends on when your child will be 9 months old:
30 hours for children aged 3 to 4 years
You can apply from when your child is 2 years and 36 weeks old. The application timing depends on your child’s third birthday:
If you’re returning to work or starting a new job: The date you start or return to work affects when you can apply for free childcare:
To apply, you’ll need to set up a childcare account. You’ll need your details (and your partner’s, if you have one), including your National Insurance number and Unique Taxpayer Reference (UTR) if you’re self-employed. You’ll also need the UK birth certificate reference number of any children you’re applying for and the date you started or are due to start work.
For many parents, the notion of “adjusted net income” exceeding £100,000 can feel like a double-edged sword. On the one hand, it’s a testament to career success, on the other, it means a significant loss of childcare benefits. However, there are several strategies to legally manage your income and stay below the threshold. To start with you should look to see whether you can make any salary sacrifice arrangement with your employer. This might include additional pension contributions or other benefits like cycle-to-work schemes, which reduce your taxable income.
For Example: One of our clients, Alex, a marketing director, opted to increase their salary sacrifice towards childcare vouchers and additional pension contributions. This not only reduced their current taxable income but also ensured they remained eligible for the free childcare hours.
Additionally, if possible, defer bonuses or other forms of income to the next tax year. This can help manage your earnings to stay under the threshold.
Example: Sameer, an IT consultant, chose to defer their annual bonus to the next financial year, ensuring their current year income remained below the £100,000 mark. This simple strategy allowed their family to continue benefiting from the free childcare support.
One of the most effective ways to reduce your adjusted net income is by contributing more to your pension. Not only does this lower your taxable income, but it also secures your future. For example, if you’re earning £105,000, contributing £6,000 to your pension can bring your net income down to £99,000, keeping you eligible for free childcare.
Think of it like planting seeds for a future orchard. While you might miss out on some fruit now, you’ll have a bountiful harvest later.
Making charitable donations can also reduce your taxable income. By giving to charity, you not only support good causes but also benefit from tax relief, which can bring your adjusted net income below the threshold. It’s like giving a little to get a lot back. Your generosity not only helps others but also helps you keep valuable benefits.
Investing in tax-efficient savings schemes like ISAs can help manage your taxable income. These investments grow tax-free, meaning they don’t contribute to your adjusted net income.
Example: Casey, a freelance graphic designer, regularly invests in ISAs. By doing so, they keep their taxable income lower and benefit from the growth of their investments without affecting their eligibility for childcare support.
Tax-efficient investments like ISAs offer flexibility and security. They allow you to save up to £20,000 per year, and any returns on these investments are completely tax-free. This not only helps in managing your current taxable income but also ensures your savings grow efficiently over time, providing a robust financial cushion for future expenses, such as your child’s education or unexpected costs.
Think of it like storing your money in a greenhouse where it can grow and thrive without being affected by the external weather – in this case, taxes. Your investments flourish without adding to your income, keeping you eligible for benefits.
Consider the story of Jamie and Taylor, both successful professionals. Faced with the prospect of losing free childcare for their three-year-old, they consulted a financial adviser. By adjusting their pension contributions and deferring a portion of their bonuses, the primary bread-winner managed to bring their adjusted net income below £100,000. This not only preserved their childcare benefits but also improved their long-term financial security.
Another example is Jordan and Morgan, one of them was hesitant to accept a promotion at work due to the risk of losing childcare support. By increasing their pension contributions and making use of salary sacrifice schemes, they were able to accept their promotion without losing their eligibility for free childcare. This not only enhanced their career progression but also ensured financial stability for their family.
Balancing a high-earning career and family needs is challenging, but with careful financial planning, you can make the most of the available support systems. By leveraging strategies like increased pension contributions, salary sacrifice schemes, and tax-efficient investments, you can stay below the £100,000 threshold and retain your free childcare benefits. Consulting with a financial adviser can provide you with the personalised guidance needed to navigate these decisions effectively.
A financial adviser can help you explore all available options and make informed decisions. Their expertise ensures you can maximise your financial benefits while remaining compliant with regulations.
Have you considered using a financial adviser? People with earnings close to this mark, especially those with children, could benefit greatly from financial advice. Take a poke around our website and see what you think.
Author: Cherie-Anne Baxter
Date Written: 26th July 2024
Updated: 26th July 2024
Approver: Quilter Financial Limited 2nd August 2024
Risk Warnings
The Financial Conduct Authority do not regulate tax planning.
For ISA’s Investors do not pay any personal tax on income or gains but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA manager . Tax treatment varies according to individual circumstances and is subject to change.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
The figures in this article are correct on the day the article was published or updated.
