Free childcare- Please help me calculate my adjustable net income

jaideep211

Hi

I am confused about free childcare and adjustable net income. Per my P60 for 2023-24, my taxable income was £110,380 (after deducting the payments into workplace pension). 

During the year I also paid into private pension in the amount of £7,760. My private pension contribution was grossed up by basic rate of 20% to £9,700. I know I can claim another 20% (£1,940) when filing self assessment. 

Please advise which of the following calculations for adjustable net income are correct: 

a) £110,380 - £9,700 = £100,680

b) £110,380 - £9,700 - £1940 = £98,740

If (b) is correct, what document would I need to submit in order to prove the adjustable net income for 15 hour free childcare 

Many thanks in advance. 

[Deleted User]

a) is correct on the assumption that £110380 is the P60 figure after pension deductions I.e. it does not show another amount and you have deducted your pension contributions to arrive at £110380. (It is not completely clear). Presumably pension contributions come off your gross pay before tax is calculated)

£9700 is also the correct entry on your tax return. 

Dazed_and_C0nfused

I know I can claim another 20% (£1,940) when filing self assessment. 

The gross contribution of £9,700 will have two benefits on your Self Assessment return.

1.  Your basic rate band will be increased by £9,700 so more income is taxed at 20% and less at 40%

2.  You're adjusted net income is £9,700 less than without the contribution which, on the figures you have provided, means you will retain more of your Personal Allowance.

The overall tax saving will be far more than £1,940.  And that's on top of the £1,940 the pension company added in basic rate tax relief.

Doesn't help with your childcare issue though.

jaideep211

[Deleted User] said:

a) is correct on the assumption that £110380 is the P60 figure after pension deductions I.e. it does not show another amount and you have deducted your pension contributions to arrive at £110380. (It is not completely clear). Presumably pension contributions come off your gross pay before tax is calculated)

£9700 is also the correct entry on your tax return. 

The figure of GBP110,380 is after deduction of workplace pension. 

jaideep211

Dazed_and_C0nfused said:

I know I can claim another 20% (£1,940) when filing self assessment. 

The gross contribution of £9,700 will have two benefits on your Self Assessment return.

1.  Your basic rate band will be increased by £9,700 so more income is taxed at 20% and less at 40%

2.  You're adjusted net income is £9,700 less than without the contribution which, on the figures you have provided, means you will retain more of your Personal Allowance.

The overall tax saving will be far more than £1,940.  And that's on top of the £1,940 the pension company added in basic rate tax relief.

Doesn't help with your childcare issue though.

Thanks for the reply. Could you elaborate why the tax saving should be >1940. I just ran my numbers on a self assessment software and it quotes approx GBP1800 as refund. 

Dazed_and_C0nfused

jaideep211 said:

Dazed_and_C0nfused said:

I know I can claim another 20% (£1,940) when filing self assessment. 

The gross contribution of £9,700 will have two benefits on your Self Assessment return.

1.  Your basic rate band will be increased by £9,700 so more income is taxed at 20% and less at 40%

2.  You're adjusted net income is £9,700 less than without the contribution which, on the figures you have provided, means you will retain more of your Personal Allowance.

The overall tax saving will be far more than £1,940.  And that's on top of the £1,940 the pension company added in basic rate tax relief.

Doesn't help with your childcare issue though.

Thanks for the reply. Could you elaborate why the tax saving should be >1940. I just ran my numbers on a self assessment software and it quotes approx GBP1800 as refund. 

Have you compared the calculation with and without the pension contributions?

[Deleted User]

Dazed_and_C0nfused said:

jaideep211 said:

Dazed_and_C0nfused said:

I know I can claim another 20% (£1,940) when filing self assessment. 

The gross contribution of £9,700 will have two benefits on your Self Assessment return.

1.  Your basic rate band will be increased by £9,700 so more income is taxed at 20% and less at 40%

2.  You're adjusted net income is £9,700 less than without the contribution which, on the figures you have provided, means you will retain more of your Personal Allowance.

The overall tax saving will be far more than £1,940.  And that's on top of the £1,940 the pension company added in basic rate tax relief.

Doesn't help with your childcare issue though.

Thanks for the reply. Could you elaborate why the tax saving should be >1940. I just ran my numbers on a self assessment software and it quotes approx GBP1800 as refund. 

Have you compared the calculation with and without the pension contributions?

The difference is possibly due to the small loss of personal allowance perhaps not factored in. . Adjusted net income is £100680 - £340 loss of personal allowance. This means that £340 of income not previously taxed is now taxed at 40% - £136. 

kinger101

If you do indeed have an ANI of £100,680 then you have lost 15 if the free hours as well as any of the 25 percent top up on childcare costs for the year in question.  Assuming this is lazy year and you've already claimed these, then you cannot make retrospective pension contributions.

Charity contributions made via gift aid can me deemed to have been made in the previous year.

I'd make a donation to drop back down below 100k.  Otherwise, that 680 will have a marginal rate well in excess if 100 percent

jaideep211

kinger101 said:

If you do indeed have an ANI of £100,680 then you have lost 15 if the free hours as well as any of the 25 percent top up on childcare costs for the year in question.  Assuming this is lazy year and you've already claimed these, then you cannot make retrospective pension contributions.

Charity contributions made via gift aid can me deemed to have been made in the previous year.

I'd make a donation to drop back down below 100k.  Otherwise, that 680 will have a marginal rate well in excess if 100 percent

Many thanks for the response. I have one more piece of info that may change your response (did not think this was relevant earlier but after browsing the internet I thought this may be material info). 

I joined my current job on Mar 20, 2023 (just before the end of previous tax year). As a result my first pay slip on April 2023 (tax year 2023-24) reflected back pay for March for £4,230. As well, it also reflected the sign on bonus of £8,000 that was due to be paid to me in March 2023 upon joining however, was not paid until April 14, 2023. This had the effect of significantly boosting my gross salary in P60 for tax year 2023-24 due to which I am struggling to reduce my income below 100k in order to qualify for 15 hours of free childcare (despite contributing to private pension)

1. Is there anything I can do such that the back payments do not reflect as my salary for 2023-24 while filing my return?

2. Regarding Gift aid, can I still make the payment (after the tax year but before filing the 2023-24 return) despite being a high tax earner? 

Again many thanks for your response. 

[Deleted User]

Not much that can be done about 1) at this stage.

with regard to 2) - you are correct. Play about with the figures - on £680 over the £100000 limit you need to make a gift aid contribution of £544- and view your calculation to check your adjusted net income. 

Give yourself a bit of leeway though and, as you say, do NOT submit the return without having ensured that you have a) made the gift aid payment and b) made the carry back claim on the return. 

kinger101

jaideep211 said:

kinger101 said:

If you do indeed have an ANI of £100,680 then you have lost 15 if the free hours as well as any of the 25 percent top up on childcare costs for the year in question.  Assuming this is lazy year and you've already claimed these, then you cannot make retrospective pension contributions.

Charity contributions made via gift aid can me deemed to have been made in the previous year.

I'd make a donation to drop back down below 100k.  Otherwise, that 680 will have a marginal rate well in excess if 100 percent

Many thanks for the response. I have one more piece of info that may change your response (did not think this was relevant earlier but after browsing the internet I thought this may be material info). 

I joined my current job on Mar 20, 2023 (just before the end of previous tax year). As a result my first pay slip on April 2023 (tax year 2023-24) reflected back pay for March for £4,230. As well, it also reflected the sign on bonus of £8,000 that was due to be paid to me in March 2023 upon joining however, was not paid until April 14, 2023. This had the effect of significantly boosting my gross salary in P60 for tax year 2023-24 due to which I am struggling to reduce my income below 100k in order to qualify for 15 hours of free childcare (despite contributing to private pension)

1. Is there anything I can do such that the back payments do not reflect as my salary for 2023-24 while filing my return?

2. Regarding Gift aid, can I still make the payment (after the tax year but before filing the 2023-24 return) despite being a high tax earner? 

Again many thanks for your response. 

Apologies for late response, but Ferro's answer covered it.  Making a gift aid payment as outlined will we worth it in this instance.