High Earner tax and tax free childcare rejected

Browniepoints

Hello - I'm hoping for some help as I'm a first time 'high earner' and it happened without me even knowing it. I'm in London and going slightly in red every month due to mortgage and multiple children.. I live fairly tight, there's no living expenses I can cut further back on because all expenses are nursery, mortgage, gas, electric and basic groceries. I'm panicking a bit as I'm now losing out on a grant I was relying on for nursery.

The tax free center sent me a message letting me know they rejected my request for tax free childcare. I got flagged in their system as likely to earn over the adjust net income (Which I didn't realize just meant 'taxable income'- neither did the person on the phone, it took them 20 minutes to find out how to calculate it and explain to me) of £100k this fiscal year and having looked at my payslips they are right. This year our company got some bonuses for the first time and I didnt realize how it would impact me.

I can see that I will have accumulated £114k taxable income by the end of the fiscal year. Right now, including January I am roughly at:
£91k Gross Pay / taxable pay. (The bonus constitutes around £26k. Whenever I had a payslip with bonus however I can see I get deducted over 5k which seems a lot)
£28k Tax

What can I do to maintain tax free childcare and minimize the tax imposed on me?
I'm contributing towards private pension via work already. At the start of the year I contributed just 5% but in September I increased it to 12%. Clearly, this wasnt enough..

My partner isnt going to earn quite as much- is there any way we can shift our assets to benefit us here?
I'm asking mainly because the gov childcare center said moving the account to my partner wouldn't help because I as the partner still would disqualify us from getting the benefit. But how is that fair? Two adults earning £90k each CAN get childcare but two adults where one earns over £114k and the other earns £30k cannot get benefit..

If there's any information you would need to help me, please let me know. I'm not savvy with money, clearly, and didnt realize how big problem this is for me until I saw I was lacking funds for nursery this month.

Dazed_and_C0nfused

Not an expert on tax free childcare sorry but there are some other things you need to be aware of.

Once your taxable income (which is completely different to adjusted net income) exceeds £100k you will be required to complete an annual Self Assessment return.

You are likely to owe quite a lot of tax in the current tax year (the first where your adjusted net income exceeds £100k) as HMRC will have given you the full Personal Allowance but you are probably only due part of it.  So when you come to complete your Self Assessment return the tax owed will have to be paid by 31 January 2023.

You can pay it via your 2023:24 tax code providing you file your return by 30 December 2022 (and are still earning good money).

Pension contributions are very tax efficient at your level of income but you 100% need to understand which method is used to pay them as they all work differently for tax purposes.  Some reduce adjusted net income but no taxable income.  But increase your basic rate tax band so more tax is charged at 20% and less at 40%.

Are either of you receiving Child Benefit?

sheramber

Tax free childcare is a joint account and of either party earns over £100k  you are not eligible for free childcare.

It is the same with the £50,000  amount for child benefit- if one party is over the limit you are not eligible for child benefit.

the unfairness of this has been highlighted to the government but they have chosen to not to change the rules.

The only way to reduce your net income would be  to pay out money elsewhere- certain pension payments or gift aid to a charity.

Chris_English

If you are struggling for money then adding more to your pension isn’t going to help. Despite being tax efficient, it still means that you have less money now than if you weren’t contributing.

It sounds as though you need to work out exactly where your money is going, so would benefit from filling out a full statement of affairs, and then posting it here so that people can give you the best advice.

Browniepoints

Dazed_and_C0nfused said:

Once your taxable income (which is completely different to adjusted net income) exceeds £100k you will be required to complete an annual Self Assessment return.

You are likely to owe quite a lot of tax in the current tax year (the first where your adjusted net income exceeds £100k) as HMRC will have given you the full Personal Allowance but you are probably only due part of it.  So when you come to complete your Self Assessment return the tax owed will have to be paid by 31 January 2023.

You can pay it via your 2023:24 tax code providing you file your return by 30 December 2022 (and are still earning good money).

Pension contributions are very tax efficient at your level of income but you 100% need to understand which method is used to pay them as they all work differently for tax purposes.  Some reduce adjusted net income but no taxable income.  But increase your basic rate tax band so more tax is charged at 20% and less at 40%.

Are either of you receiving Child Benefit?

I thought so too regarding net pay. This is from gov.uk website 
"If you or your partner have an expected ‘adjusted net income’ over £100,000 in the current tax year you will not be eligible. This includes any bonuses you expect to get."

However when I called to understand why I was cut off they explained 'Your adjusted net income is your total taxable income before any personal allowances and minus things like Gift Aid.'.


How much am I likely to owe? The idea of this terrifies me.. I have some savings but given I probably also have to pay back £1500 in childcare for this year I don't know what I can do.

'Tax year to date' says Ive earned 91k gross pay, 91k taxable pay and taxed 28k already.

Neither me or my partner are getting any child benefit as we would have to pay it straight back anyway.


Pension contributions: I do them via my work- they take care of everything. Looking at my 'tax year to date' it sounds like gross pay and taxable pay are the same so it does not reduce taxable income..?!?

Browniepoints

sheramber said:

Tax free childcare is a joint account and of either party earns over £100k  you are not eligible for free childcare.

It is the same with the £50,000  amount for child benefit- if one party is over the limit you are not eligible for child benefit.

the unfairness of this has been highlighted to the government but they have chosen to not to change the rules.

The only way to reduce your net income would be  to pay out money elsewhere- certain pension payments or gift aid to a charity.

Thanks for confirming.. As in my previous post the explanation on their website confused me. I thought I was way off £100k as I understood 'adjusted net income' to be very different from taxable pay..

Browniepoints

Chris_English said:

If you are struggling for money then adding more to your pension isn’t going to help. Despite being tax efficient, it still means that you have less money now than if you weren’t contributing.

It sounds as though you need to work out exactly where your money is going, so would benefit from filling out a full statement of affairs, and then posting it here so that people can give you the best advice.

I know where it all is going. Nursery is £1400 per child. mortgage is ~£1400. Bills (electric and gas) add up and other than that my luxuries are netflix and internet. Thanks but in terms of basic budgeting I know I can't do any better.

I have some savings which I keep taking from as I'm going in red but if I get a big hit on tax or need to pay back for the tax free childcare I had so far then I will probably be empty.

Dazed_and_C0nfused

Neither me or my partner are getting any child benefit as we would have to pay it straight back anyway.

You've got the wrong end of the stick there.

For example if you received Child Benefit in April 2021 (after 5 April) and your 2021:22 Self Assessment return showed you owed say £2k it might be March 2024 before you paid it all back.

But not having it in the first place and having to worry about paying it all back later is clearly much simpler.

How much am I likely to owe? 

What is your current tax code (from your latest payslip)?

Pension contributions: I do them via my work- they take care of everything. Looking at my 'tax year to date' it sounds like gross pay and taxable pay are the same so it does not reduce taxable income..?!?

That could be because you are making "relief at source" contributions.  That's where you pay the net amount and the pension company adds basic rate tax relief.  For example you pay £1,000 and your pension fund becomes £1,250 with the tax relief.

This type of contribution reduces your adjusted net income and increases your basic rate tax band (more tax at 20% and less at 40%).  Very tax efficient.

Or maybe you aren't contributing but agreeing to a lower salary in return for your employer contributing more?  Known as salary sacrifice of smart pensions these do not reduce your adjusted net income but are the most tax efficient as you don't have the income to pay tax or NI on in the first place.

You really need to understand how you are getting money into your pension, all the different methods work differently for tax purposes so if you don't know you can't make sure you pay the correct amount of tax.

If it turns out you have been making "relief at source" contributions then have you been claiming the higher rate tax relief from HMRC.  This is something you are personally responsible for, it's not your employer's job or the pension companies.

Chris_English

Browniepoints said:

Chris_English said:

If you are struggling for money then adding more to your pension isn’t going to help. Despite being tax efficient, it still means that you have less money now than if you weren’t contributing.

It sounds as though you need to work out exactly where your money is going, so would benefit from filling out a full statement of affairs, and then posting it here so that people can give you the best advice.

I know where it all is going. Nursery is £1400 per child. mortgage is ~£1400. Bills (electric and gas) add up and other than that my luxuries are netflix and internet. Thanks but in terms of basic budgeting I know I can't do any better.

I have some savings which I keep taking from as I'm going in red but if I get a big hit on tax or need to pay back for the tax free childcare I had so far then I will probably be empty.

So what are you going to do then? It’s not sustainable to continue to spend more than you earn.

I’m not sure, if you are struggling, why you are paying so much for nursery. My wife and I are fortunate that we are on a fair amount more than you, but we don’t pay that much in London.

You say that you are not savvy with money, but even so, you should be able, to get through each month on what sounds to be likely to be around £10,000 per year between you after tax.

richiez

Once you earn over £100k, as well as the 40% tax, you lose £1 of your tax free allowance for every £2 you earn.  On top of this, if you lose the maximum £2000 tax free contribution from the childcare, you are effectively giving up £10400 of that extra £14000 to taxes.

I suggest you take some time to calculate how much you've earnt so far, how much your adjusted net income will be once you factor in the pension paid into as well as any charitable donations you've made.  Then see what you need to pay into a SIPP or in extra work pension contributions to reduce it to below £100k.  You will have to do a tax return anyway to work out these figures so its worth sitting down and spending some time working it out while you can still make a difference.

As Dazed and Confused says, without knowing how your pension is contributed to, you're not going to know exactly where your adjusted net income is sitting until you do the Tax return in April, by which time it will be too late to make it tax efficient.  You may find you only need to add a few thousand to a SIPP to save yourself £10K in tax.

If and when you can bring yourself under the £100K adjuested net income mark, you can call or write to HMRC childcare dept and explain that your tax return will show an income which will be within the limits of the scheme, and they should reinstate the payment.  obviously if you dont achieve it then you will be liable to repay the £2000 already given.

If you're struggling to work it out for yourself then you will be as well using an accountant to help you plan for your tax return, the online ones will generally prepare a self assessment for a couple of hundred pounds.  It will be money well spent but the key is to get it all done as soon as you can. 

Chris_English

If the OP is in the red every month then I don’t think advising them to increase pension contributions is the best advice. The shortfall is going to build up every month, and this could be the start of trading down a bad path. Funding pension contributions with debt won’t often be a good idea.