Email your tax questions to Mike via email: taxhacks@telegraph.co.uk
Dear Mike,
I’m 38 years old, recently married with a one-year-old daughter. My wife and I both work full-time and my daughter is in nursery five days a week.
I’m currently earning just below £100,000 after taking off pension contributions and charitable payments. I was thrilled the other week to find out that from April 2 2024, I will be promoted and my new salary will be £115,000.
However, I have calculated the cash impact of my promotion and was shocked by how little of this pay rise I would keep. In particular, I will have an effective 62pc tax rate with the loss of personal allowance and 2pc NIC, and lose all support in respect of childcare.
I then compared the position if I earned £92,000 for a four-day week and paying for one fewer day of childcare at £90 a day. According to my calculations, I would be only a little better off through the year working five days compared to four days, despite receiving gross £23,000 extra.
This position will only worsen when my son reaches two/three as I will not receive the benefit of the additional funding.
I am seriously considering asking my employer if I could reduce to a four-day week following my promotion.
Have I missed something here? Surely the intention cannot be to disincentivise work?
David
Dear David,
Thank you for highlighting this anomaly in the tax and benefits system, which I know annoys many Telegraph readers.
I believe your concerns are essentially correct. Your promotion will take you into the band above £100,000 a year where personal allowances are phased out at £1 for every £2 of the excess. As you say, this produces an effective income tax rate of 60pc – or 62pc if we include 2pc National Insurance.
In addition, with your income above £100,000 a year you will lose any childcare support, which would otherwise be worth 20pc of any bill up to a maximum of £2,000 a year per child.
If you were able to agree a four-day working week with your employer at £92,000 a year you would also save about £4,700 a year in childcare costs, and presumably some travel costs.
If you stay working a full week your gross income will rise by £15,000, but your tax and NI bill will take £9,300 of that. With the loss of childcare support that will leave you just £3,600 better off in cash terms, equivalent to a tax rate of 76pc.
By working a four-day week at £92,000 a year your gross income will fall by £8,000 from your current salary and your tax and NI bill will fall by £3,360. You will keep your childcare support and you will save about £4,680 in childcare costs. In overall cash terms that would leave you in almost the same position as you are currently, even excluding any saving in travel costs.
I’m afraid the position will only worsen as your daughter ages. Earning over £100,000 means you will not access the two-year-old funding of 570 free hours of nursery care worth £4,560 per annum, assuming a childcare rate of £8 an hour. In addition, you will still lose the £2,000 support for childcare available to those who use more than 570 of free hours.
At that point you will very likely be better off financially by working four days a week and taking a £23,000 pay cut. When your daughter reaches three, you will only be entitled to 570 free hours of childcare, and not the 1,140 free hours available to people earning less than £100,000. So again a cost to you of £6,560 per annum, compared to those earning less than £100,000.
If you have another child the position will only worsen still, especially as the Government is due to roll out the free hours of childcare to all ages later this year. Two children at nursery at the same time will cost an individual earning over £100,000 a year approximately £13,120 in childcare support, depending on their circumstances.