Households with two children where one parent earns just over £100,000 could lose around £28,000 in childcare funding under current rules, even as the Conservatives pledge to scrap the threshold. Sarah Coles, head of personal finance at AJ Bell, said the party's proposal "would put tens of thousands of pounds into the pockets of working parents, who could be tipped over the edge even if all their pay does is keep up with inflation".
Tory Childcare Pledge
Tory leader Kemi Badenoch unveiled a raft of policy pledges in her speech at the Tory party conference this week, including free childcare for higher-earning parents. The current rules mean parents in England stop getting childcare support when either one of them has an adjusted net income of over £100,000. But under the proposals, all parents working 16 or more hours a week would be eligible to get 30 hours of free care a week.
The policy is estimated to cost £700 million a year, which could be funded by reducing the number of public servants at arms-length bodies. Ms Badenoch indicated people earning as much as £1 million a year would still be eligible for the entitlement but insisted the pledge was targeted at earners around the £100,000 threshold.
£28,000 Loss Analysis
Ms Coles says the online investment platform's analysis shows a "family with two young children can lose around £28,000 in childcare funding if they earn even £1 more than the threshold – by which time they have also lost child benefit (at £80,000 of earnings), taking the total in lost tax-free childcare, support from the free hours scheme and child benefit to over £30,000".
She noted that the free hours childcare rate "varies by region so in some areas the cost to parents who lose the entitlement is even more". "Losing childcare support is particularly expensive, because parents lose a big chunk of support as soon as they hit the earnings limit," the finance expert added. "It isn’t tapered away gradually, hence the ‘cliff edge’ moniker."
All entitlement to tax-free childcare, worth up to £2,000 per child per year, is taken away. Parents also forgo all of the 30 hours funded term time childcare for nine-month to three-year-old children and half of the 30 hours for children aged between three and four. "It means parents over the earnings limit will only be entitled to the universal 15 funded hours in term time for three- and four-year-olds," Ms Coles said.
Tax and Timing Concerns
This is on top of the fact that anyone with earnings between £100,000 and £125,140 faces an effective income tax rate of 60%, because for every £2 you earn over £100,000, you lose £1 of your personal allowance. "Once you earn £125,140, you will have lost the allowance entirely, and you move into the 45% tax bracket," she added.
Ms Coles highlighted that such a change would depend on Ms Badenoch remaining leader in the longer term, and the Tories winning back power at the next election. A national poll would have to take place in August 2029 at the latest, assuming Andy Burnham doesn't call an early election to capitalise on Labour's polling bounce under his premiership. "But those who currently have children might see them age out of the expensive childcare years before a vote is called," she said.
"Given the fact the Conservative party is third in the polls at the moment, higher earners can’t entirely rely on political change to make their finances add up," Ms Coles warned.
Reducing Exposure
The threshold is based on adjusted net income, which the GOV.UK website explains is total "taxable income before any Personal Allowances and less certain tax reliefs". But there are legitimate ways to reduce your exposure to the threshold by reducing your taxable income, Ms Coles said, citing various approaches, including making pension contributions.
"This can actually leave you in a better overall position. It cuts your adjusted net income, and could take you below the cliff edge, allowing you to claim childcare funding. On top of this, you’re building your financial resilience in retirement at the same time."
