Productivity experts suggest that sometimes you have to do less to get more.
This is something that equally applies to high earners who paying for childcare.
Earnings and Childcare
According to the UK government, nearly one million people in the UK earn between £75,300 and £96,400, most of whom are over 35.[1] At first glance, this income seems comfortable. However, our highest-earning years sometimes coincide with the most costly time of raising children. With the average family having about two children, many can relate to the expenses of early parenting.
The government helps parents in a few ways:
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15 hours of free childcare weekly for working parents with kids aged 9 months to 2 years.
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30 hours of free childcare weekly for kids aged 3-4 years.
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Tax-free childcare: Up to £2,000 per year per child (the government contributes £2 for every £8 you pay), subject to eligibility and income limits.
These benefits have helped many parents gain financial stability. A 2017 study by PwC and the Salvation Army found that state-funded childcare support added about £22.3 billion to the UK economy and allowed 286,000 more people to join the workforce.[2]
The Surprising “Cliff Edge”
If you earn over £100,000, you could lose free childcare hours and part or all of your tax-free personal allowance. This means earning more might make you worse off.
For example, consider Anna, 40, who returned to her IT job after having her second child. She earns £95,000, which gives her 45 hours of free childcare for both kids and tax-free childcare benefits.
A few months later, Anna learns she will receive a £25,000 bonus for her hard work. This sounds great, but surpassing the £100,000 income mark means she loses her free childcare hours and tax-free benefits. Considering the additional tax she must pay, including a reduction in her personal allowance, Anna loses £6,787 overall. [3]
A Potential Solution
Good news: Anna can benefit without losing out. If her employer puts a £25,000 pension contribution in her pension instead of giving it as a bonus, her taxable income stays under £100,000. This is done through salary sacrifice:
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The employer pays the bonus directly into Anna’s pension.
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This lowers her taxable income, keeping it below £100,000.
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The employer also adds back the national insurance savings (13.8%) into her pension, raising the total contribution to £28,450.
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Anna keeps her free childcare and tax-free childcare.
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The amount she has saved for retirement has grown significantly.
Knowledge Is Power
Anna’s story shows how knowing about taxes and childcare rules can help. By contributing to her pension wisely, she:
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Keeps her childcare benefits.
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Prevents a drop in her net income.
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Prepares for a better financial future.
In this situation, earning just under £100,000 can be more beneficial over time, especially with good pension planning. The goal is not just to meet today’s needs but also to plan for the future.
You can schedule a free, no-obligation chat here. A guide on selecting a financial advisor is also available here.
[1]https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/bulletins/lowandhighpayuk/2023
[2] https://www.pwc.co.uk/press-room/press-releases/economic-impact-extension-childcare-support.html
[3] The assumption of childcare costs is £7.77 per hour for 50 hours a week for each child and paid for 52 weeks. Government assistance equates to £7.77 per hour for 45 hours a week and paid for 38 weeks.
