Tax free childcare - lowering “adjusted net income”
Discussion
Hi guys, looking for some help. I am likely to earn over £100k this tax year (2022-2023). In the last few years I have been fairly close, but this is the first time I will go over.
We have been utilising the tax free childcare scheme where we pay 80% of our childcare bill into the government’s online portal and they top up the remaining 20%.
My understanding is that we won’t be eligible for this tax free childcare scheme once my “adjusted net income” for 2022-2023 is over £100k.
I have two pensions; one is an employer pension with Scottish Widows, and I also have a separate one with SJP… both are paid into AFTER tax and I get 20% tax relief (I also claim the extra higher rate 20% via self assessment each year. I believe this is called “relief at source”.
My pension payments for this year are approx £2k, so minimal. Mainly because we’ve been prioritising money on the baby. I’ve also made little to no gift aid donations nor payments to any trade unions.
From a bit of Googling, it looks like the way to resolve the issue is make some large pension payments before the end of the tax year, I’ve checked and I think I can lower my adjusted net income to below £100k.
My questions are:
1. If I do this, how will HMRC know that I’ve done this and know that I’m still eligible?
2. If I was theoretically to go over, would they make me pay back the tax free childcare from the tax year I earned it in, or will I just not be eligible for next tax year? Or both?
3. Am I right in thinking that for every £1 you earn over £100k you lose a pound from your £12,570 allowance? I.e if you earn £110k you might as well pay that £10k into your pension, otherwise it’s just paid as tax?
4. Is there anything I’m missing?
I think that’s all my questions for now. Any help would be greatly appreciated.
We have been utilising the tax free childcare scheme where we pay 80% of our childcare bill into the government’s online portal and they top up the remaining 20%.
My understanding is that we won’t be eligible for this tax free childcare scheme once my “adjusted net income” for 2022-2023 is over £100k.
I have two pensions; one is an employer pension with Scottish Widows, and I also have a separate one with SJP… both are paid into AFTER tax and I get 20% tax relief (I also claim the extra higher rate 20% via self assessment each year. I believe this is called “relief at source”.
My pension payments for this year are approx £2k, so minimal. Mainly because we’ve been prioritising money on the baby. I’ve also made little to no gift aid donations nor payments to any trade unions.
From a bit of Googling, it looks like the way to resolve the issue is make some large pension payments before the end of the tax year, I’ve checked and I think I can lower my adjusted net income to below £100k.
My questions are:
1. If I do this, how will HMRC know that I’ve done this and know that I’m still eligible?
2. If I was theoretically to go over, would they make me pay back the tax free childcare from the tax year I earned it in, or will I just not be eligible for next tax year? Or both?
3. Am I right in thinking that for every £1 you earn over £100k you lose a pound from your £12,570 allowance? I.e if you earn £110k you might as well pay that £10k into your pension, otherwise it’s just paid as tax?
4. Is there anything I’m missing?
I think that’s all my questions for now. Any help would be greatly appreciated.
After a bit more research I think that I have the answers to some of my questions, below in bold.
2. If I was theoretically to go over, would they make me pay back the tax free childcare from the tax year I earned it in, or will I just not be eligible for next tax year? Or both? They only make you pay back the tax free childcare from the tax year you earned over £100k. You start again from zero in the next tax year and are immediately eligible again.
3. Am I right in thinking that for every £1 you earn over £100k you lose a pound from your £12,570 allowance? I.e if you earn £110k you might as well pay that £10k into your pension, otherwise it’s just paid as tax? This wasn’t quite right. But earnings between £100k-£112,570k are technically taxed at 60%. So I’m far better off paying into my pension.
Still not sure on the answer to question 1. What I’m worried about is I pay a large chunk of my March earnings into my pension and they don’t “recognise” the change to my adjusted net income.
I need clarity on question 2 because I may decide to not pay into my pension and simply pay the tax free childcare back (if I become immediately eligible for TY 23-24). If I don’t become eligible again then that is a bigger financial penalty.
2. If I was theoretically to go over, would they make me pay back the tax free childcare from the tax year I earned it in, or will I just not be eligible for next tax year? Or both? They only make you pay back the tax free childcare from the tax year you earned over £100k. You start again from zero in the next tax year and are immediately eligible again.
3. Am I right in thinking that for every £1 you earn over £100k you lose a pound from your £12,570 allowance? I.e if you earn £110k you might as well pay that £10k into your pension, otherwise it’s just paid as tax? This wasn’t quite right. But earnings between £100k-£112,570k are technically taxed at 60%. So I’m far better off paying into my pension.
Still not sure on the answer to question 1. What I’m worried about is I pay a large chunk of my March earnings into my pension and they don’t “recognise” the change to my adjusted net income.
I need clarity on question 2 because I may decide to not pay into my pension and simply pay the tax free childcare back (if I become immediately eligible for TY 23-24). If I don’t become eligible again then that is a bigger financial penalty.
Agree with your conclusions.
Anything over £100k means you're losing both your tax-free childcare and personal allowance, which gets even more critical when you're eligible for 30 free hours rather than just the £2k tax free childcare. e.g. on £112.5k, you could be taxed 60% of the £12.5k, and lose £5k or so's worth of 30 free hours.
100% pay more into your pension to ensure you're under the threshold.
Anything over £100k means you're losing both your tax-free childcare and personal allowance, which gets even more critical when you're eligible for 30 free hours rather than just the £2k tax free childcare. e.g. on £112.5k, you could be taxed 60% of the £12.5k, and lose £5k or so's worth of 30 free hours.
100% pay more into your pension to ensure you're under the threshold.
Thanks for your reply.
Yes indeed. The tax implications of earning between £100-125k are huge, it’s effectively a 60% tax rate.
So even with the childcare put to one side, it makes sense to pay into my pension regardless. Just enough to bring my adjusted net down to £99.9k.
ETA: It’s actually £100k to £125,140 where you are taxed @ 60% (double the personal allowance).
This is because you lose £1 of your personal allowance for every £2 you earn.
So my figure of £112,570 in an earlier post was incorrect.
Yes indeed. The tax implications of earning between £100-125k are huge, it’s effectively a 60% tax rate.
So even with the childcare put to one side, it makes sense to pay into my pension regardless. Just enough to bring my adjusted net down to £99.9k.
ETA: It’s actually £100k to £125,140 where you are taxed @ 60% (double the personal allowance).
This is because you lose £1 of your personal allowance for every £2 you earn.
So my figure of £112,570 in an earlier post was incorrect.
Edited by Cl4rkyPH on Tuesday 7th March 13:55
Gotcha.
My only other question is, will my payslip for March include the loss of some of my personal allowance? I.e will PAYE tax the portion of my pay over £100k at “60%”, in that pay packet?
I’m getting a bit confused because my gross pay will be over £100k, but then my “last minute” pension payment will take me under adjusted net £100k.
I.e when do I lose some of my personal allowance? Will it be taken via tax in my final payslip automatically? Or will it be taxed via a change in my tax code throughout the next FY23-24?
I guess my question is, if I lose some of my personal allowance from this next payslip, but I make a pension payment to reduce my adjusted net to £99.9k for the year, when do I get back the personal allowance that I didn’t have to lose? Do I just get it back from self assessment (like pension tax relief)?
Sorry, bit of a novice!
My only other question is, will my payslip for March include the loss of some of my personal allowance? I.e will PAYE tax the portion of my pay over £100k at “60%”, in that pay packet?
I’m getting a bit confused because my gross pay will be over £100k, but then my “last minute” pension payment will take me under adjusted net £100k.
I.e when do I lose some of my personal allowance? Will it be taken via tax in my final payslip automatically? Or will it be taxed via a change in my tax code throughout the next FY23-24?
I guess my question is, if I lose some of my personal allowance from this next payslip, but I make a pension payment to reduce my adjusted net to £99.9k for the year, when do I get back the personal allowance that I didn’t have to lose? Do I just get it back from self assessment (like pension tax relief)?
Sorry, bit of a novice!
Edited by Cl4rkyPH on Tuesday 7th March 14:50
Cl4rkyPH said:
Gotcha.
My only other question is, will my payslip for March include the loss of some of my personal allowance? I.e will PAYE tax the portion of my pay over £100k at “60%”, in that pay packet?
I’m getting a bit confused because my gross pay will be over £100k, but then my “last minute” pension payment will take me under adjusted net £100k.
I.e when do I lose some of my personal allowance? Will it be taken via tax in my final payslip automatically? Or will it be taxed via a change in my tax code throughout the next FY23-24?
I guess my question is, if I lose some of my personal allowance from this next payslip, but I make a pension payment to reduce my adjusted net to £99.9k for the year, when do I get back the personal allowance that I didn’t have to lose? Do I just get it back from self assessment (like pension tax relief)?
Sorry, bit of a novice!
Will depend on your tax code. In simple terms if you have not gone over 100k before then you will likely still have the full personal allowance in play (assuming no p11d benefits) and you will pay at 40% effective stillMy only other question is, will my payslip for March include the loss of some of my personal allowance? I.e will PAYE tax the portion of my pay over £100k at “60%”, in that pay packet?
I’m getting a bit confused because my gross pay will be over £100k, but then my “last minute” pension payment will take me under adjusted net £100k.
I.e when do I lose some of my personal allowance? Will it be taken via tax in my final payslip automatically? Or will it be taxed via a change in my tax code throughout the next FY23-24?
I guess my question is, if I lose some of my personal allowance from this next payslip, but I make a pension payment to reduce my adjusted net to £99.9k for the year, when do I get back the personal allowance that I didn’t have to lose? Do I just get it back from self assessment (like pension tax relief)?
Sorry, bit of a novice!
Edited by Cl4rkyPH on Tuesday 7th March 14:50
Cl4rkyPH said:
Spoke to HMRC and got the answers!
They were actually really helpful and actually encouraged me to pay into my pension, which I found rather bizarre.
Did they actually confirm you have to pay back the tax free childcare if you go over? I wasn't aware they did this, as I'm not sure what mechanism they use to recover the money. I know excess child benefit is via a tax return but not sure on tax free childcare. They were actually really helpful and actually encouraged me to pay into my pension, which I found rather bizarre.
R500K said:
Will depend on your tax code. In simple terms if you have not gone over 100k before then you will likely still have the full personal allowance in play (assuming no p11d benefits) and you will pay at 40% effective still
I see. That makes sense. So if I stay under on adjusted net then I’ll probably see no changes in reality.JackReacher said:
Did they actually confirm you have to pay back the tax free childcare if you go over? I wasn't aware they did this, as I'm not sure what mechanism they use to recover the money. I know excess child benefit is via a tax return but not sure on tax free childcare.
Admittedly, I don't know that. I did ask but the lady I spoke to wanted me to go through to the eligibility team to discuss that part, but I didn’t have time.My understanding is that, as the childcare portal is linked to your government gateway ID and national insurance number; they can take it via tax/PAYE/self assessment. But I’m not sure.
I can’t remember if self assessment asks the question specifically if you utilise tax free childcare, perhaps it does?
The bottom line was that they do want it paid back, but not sure how they enforce it.
Another funny thing I’ve just realised is the portal is actually set up in my partner’s name! So not sure how they’ll track it at all.
Regardless, because of the 60% tax, I’m just going to keep my adjusted net earnings under £100k.
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