Childcare benefits with a sting in the tail for high earners

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April 14, 2023
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Up to 30 hours of free childcare per week will become available for any child older than nine months from 2024, when there is a staggered introduction starting at 15 hours in April 2024, rising to 30 hours in September 2025. This will be a welcome boost for parents struggling to manage what for some is a monthly bill higher than their mortgage. But there is a sting in the tail for higher earners.

However, it may not even be as beneficial as it first seems even for those on more nominal salaries as each local authority calculates the hourly funding rate it will allocate in a different way. So, the Government’s hourly funding rate for children aged two at £5.83, which could save parents an average of £6,646 per year on childcare, could be less depending on where you live in the country, creating something of a postcode lottery for this benefit. Parents would need to make up any shortfall for nursery care from their own pocket.

Also, free childcare only runs during term-time, so any additional childcare would need to be paid for directly themselves. But there is an additional £2,000 of tax-free childcare offered to those who are eligible.

The scheme extension means childcare for two children

The scheme has been extended to allow two children of pre-school age to get access to free childcare under the Budget announcements, which in London could mean an annual saving of around £23,300 for parents under the 30-hours of free care scheme when it finally kicks in. 

Add in the additional £2,000 of tax-free care per child and the amount saved rises to £27,300 – but there is a precipitous drop once income reaches £100,000 per year. At this point, all of these benefits are lost, and you would have to pay all of the childcare from your own pocket. 

To achieve this and be no worse off, it would mean you need to earn £156,279 before you achieved the same disposable income you had while earning up to £100,000 and benefitting from these childcare schemes in London.

For the rest of England, the average is slightly lower – with the childcare support worth £21,718 and the threshold to achieve the same disposable income once breaching the £100,000 earnings limit also being slightly lower at £146,114. But it is still a real hit to the pocket. It means parents are actually worse off if they are earning between £100,000 and £156,000 according to data from AJ Bell.

Can I do anything about this?

For any parent facing this cliff-edge change in circumstances, there is some good news. The £100,000 threshold is your income minus any pension contributions you make, so it would be wise to consider moving any additional income into your pension to take you back under the £100,000 income threshold.

This has been made significantly easier and more attractive once the penalties for breaching the Lifetime Allowance have been removed, and the other annual allowances are also increased.

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