Claiming 15 Hours Free Childcare

Jojo_072022

My current gross salary is about £104K and I make pension contributions to the tune of £7400, I initially believed that this would have made me eligible as my taxable pay would fall below £100K (£104K-£7400). I had a call from HRMC this morning who said that I won't be eligible as my salary is above the £100k threshold and since I am getting tax relief on the pension already (since taxation is done after the pension deduction from gross) this does not count to be reduced from the gross salary. 

I am not an expert on this but I am not sure if this decision can be challenged and also would you recommend a private pension without tax relief to bring my salary below the 100k mark

Dazed_and_C0nfused

Jojo_072022 said:

My current gross salary is about £104K and I make pension contributions to the tune of £7400, I initially believed that this would have made me eligible as my taxable pay would fall below £100K (£104K-£7400). I had a call from HRMC this morning who said that I won't be eligible as my salary is above the £100k threshold and since I am getting tax relief on the pension already (since taxation is done after the pension deduction from gross) this does not count to be reduced from the gross salary. 

I am not an expert on this but I am not sure if this decision can be challenged and also would you recommend a private pension without tax relief to bring my salary below the 100k mark

Are you making contributions using the relief at source method?  You need to be crystal clear about the method used as your post is a little confusing.

If so they don't reduce your taxable income.

They reduce adjusted net income (ANI) though.

What is 15 hours free childcare based on, taxable income or ANI?

Jojo_072022

Yes, I believe it is relief at source so I think you are saying then that taxable income then should be £104K. 15 hours free childcare is based on ANI so not sure if that changes anything.

I am also not sure if I should go down the route of a private pension policy as it looks like I may have to invest 4k a year to go below the £100k threshold and the benefit of the 15 hour childcare will also be ballpark in that range but it may help me next year when my son turns 3 and the 30 hour free childcare comes into play (assuming all things remain same)

r6mile

The eligibility for 15 hours free childcare is based on ANI - so on the basis of the above the OP should be eligible. Do you have significant other taxable income - ie interest, dividends, etc? As all of these will increase your ANI.

Pension payments as well as gift aid charity contributions will conversely reduce your ANI.

This from the HMRC 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.

Jojo_072022

Thank you, I do not have any other taxable income like interest or dividends. I re-read the HMRC guidance on ANI calculation.
Based on my reading it looks like pension payments only reduce the ANI if the pension contribution is without tax relief. It looks like HMRC is considering my case as one where tax relief is accounted for so if i need to go below the £100k mark I need to invest in a private pension without tax relief ?

Jojo_072022

@Dazed_and_C0nfused I got the method wrong. the tax relief for me is on my net pay and not on source

Dazed_and_C0nfused

Jojo_072022 said:

Thank you, I do not have any other taxable income like interest or dividends. I re-read the HMRC guidance on ANI calculation.
Based on my reading it looks like pension payments only reduce the ANI if the pension contribution is without tax relief. It looks like HMRC is considering my case as one where tax relief is accounted for so if i need to go below the £100k mark I need to invest in a private pension without tax relief ?

You are getting very confused.

There are three main methods of getting money into a pension.

Net pay - these are deducted before tax and are already factored in on your P60.  For example salary £120,000 with 10% net pay contribution would mean your P60 showed taxable pay of £108,000.  The £108,000 would be the starting point for ANI purposes.  The £120,000 is irrelevant. And you cannot deduct the £12,000 as it is factored into your P60.

Salary sacrifice - very similar to net pay but you are agreeing to a reduction in salary in return for extra employer contributions.  So in the example above salary of £120,000 is reduced to £108,000 be used you agree to only receive £108,000.  Your P60 would show taxable pay of £108,000 and your employer would add £12,000 to your pension fund.  £108,000 is the starting point for ANI purposes.  You cannot deduct the £12,000 as they are employer contributions.

Relief at source - totally different.  You make a net contribution and the pension company adds basic rate relief to your pension fund.  These contributions do not reduce your taxable income. Using the example above the P60 would show £120,000 and that is the starting point for ANI purposes.  But you can deduct relief at source contributions when calculating your ANI so they would knock £12,000 off immediately  dropping it to £108,000.
NB.  This assumes a gross contribution of £12,000

Jojo_072022

Thank you so very much to make this very clear to me now, I am very grateful to you. Based on your detailed response, I am definitely in the salary sacrifice bucket and £7k that I mentioned earlier is just my contribution and I have not accounted for employer. This i believe makes me eligible to the 15 hour childcare.

Dazed_and_C0nfused

Jojo_072022 said:

Thank you so very much to make this very clear to me now, I am very grateful to you. Based on your detailed response, I am definitely in the salary sacrifice bucket and £7k that I mentioned earlier is just my contribution and I have not accounted for employer. This i believe makes me eligible to the 15 hour childcare.

Salary sacrifice means you aren't contributing anything to a pension though.  It is an employer contribution.

What exactly do you mean?

You have earned £111k and sacrificed £7k so your taxable earnings are £104k

Or you have earned £104k and sacrificed £7k so your taxable earnings are £97k?

Jojo_072022

the latter, earned £104k and sacrificed £7k so taxable becomes £97k.

Dazed_and_C0nfused

Jojo_072022 said:

the latter, earned £104k and sacrificed £7k so taxable becomes £97k.

In which case how do HMRC even know about the £104k 🤔