Earning over 100k - childcare benefits.

MJC1983

Hi All,

I am in fortunate position of earning approx. £112k per annum so have never claimed for 20% against childcare costs or 30 hours free childcare now my eldest has turned 3. However; I have been advised that if I make contributions to my SIPP to bring my annual net income below £100k, this would make me eligible for the 30 hours free and the 20% discount. I wondered if anybody else was in a similar position and how they go about claiming this?

We are a single income family and with both children in nursery full time , our monthly costs are over £2k so if this could be reduced in anyway that would help.

Thanks in advance for any assistance and I fully appreciate I am in a privileged position. 

marcia_

 Didnt you already post this? 

MJC1983

I think I originally posted on the wrong board. Sorry if duplicated. 

marcia_

 NP didn't notice it was a different board probably more appropriate here. 

Dazed_and_C0nfused

Don't know much about childcare costs but the benefit there could pale into insignificance compared to the potential income tax saving of dropping your adjusted net income from £112k to £100k.

Have you not been concerned about your reduced Personal Allowance before?

MJC1983

Apologies, I am already making contributions to my SIPP to ensure that my personal allowance is not reduced. My question is really whether the contributions to the SIPP can have the affect of qualifying for 30 hours free childcare 

Grumpy_chap

The OP's other thread is here, for reference:
https://forums.moneysavingexpert.com/discussion/6385245/30-hours-free-childcare-earning-over-100k#latest

OP - can you increase pension contributions through Salary Sacrifice?  If that is available as an option from your employer, this is the most tax-effective approach.

MJC1983

I don’t believe I can no but just for my understanding how is this more tax efficient than a SIPP contribution? 

Dazed_and_C0nfused

MJC1983 said:

I don’t believe I can no but just for my understanding how is this more tax efficient than a SIPP contribution? 

Relief at source (the method you are using now) doesn't alter your taxable or NIC'able income.  You get,

the basic rate tax relief added by the pension company and

an increased basic rate tax band (more 20% tax meaning less 40% if you earn enough) and

a reduction in your adjusted net income helping avoid loss of Personal Allowance and, for some people, it helps reduce HICBC.

Salary sacrifice means you don't contribute to a pension so you miss out on all of the above.  You are agreeing to a reduced salary in return for your employer contributing more to your pension.

However, although you don't get any pension tax relief added to employer contributions you have a lower salary for tax and NI purposes so avoid paying tax and NI on the amount sacrificed.  And never need to tell HMRC about the contributions or include them on a tax return as you didn't make them.  

The lower salary means your ANI calculation has a lower starting point so you get a lot of the same benefits albeit for a slightly different reason.  

danthemoneysavingman

Salary sacrifice: you save the NI basically ;-)

kinger101

You should definitely drop your taxable income below £100K via either SIPP or salary sacrifice.

On the £12K over £100K, you're effectively paying 60% income tax  (£7,200), another potential £2K in tax-free childcare AND losing 15 hours x 38 weeks (570 hours).  Nursery fees are about £5 hour, so let's call that £2,850.

£7,200 + £2,850 + £2,000 = £12,050

So the effective tax rate is around 100%.

PS - If you don't quite get the contributions right and end up with taxable income of £100,500 etc, you can make charitable donations under gift aid and deem them to me made in the previous tax year.  Something I might need to do this year as a portion of my income is unpredictable (share options).