£100k income: Navigate the 60% tax traps and childcare cost implications

As a doctor or dentist, earning £100,000 per annum puts you and your family in a great position, doesn’t it? Sadly, it isn’t quite that simple!

In recent years, one of the most common questions and causes for concern for medics has been losing their personal allowance once they earn above £100,000. This has been particularly important for those who are soon to be or are currently parents. Those with Adjusted Net Income (your total income after allowing for certain tax reliefs and allowances) above £100,000 are losing out on crucial government-supported childcare.

Let me explain. 

The £100k tax trap has two stings in its tail!

Those who earn over £100k will feel more than one detrimental effect.

1. The loss of their personal allowance, which increases their income tax liability and

2. The loss of invaluable free childcare. 

The income tax implication

In the UK, individuals earning over £100,000 face a tax trap due to the gradual removal of their personal allowance. For every £2 earned above £100,000, £1 of the £12,570 personal allowance is lost. This effectively creates a 60% marginal tax rate on income between £100,000 and £125,140, as not only are they losing the portion of income not taxed at 20%, but they will be taxed at 40% on the income over £100,000. This is highly punitive for taxpayers.

Now let’s consider childcare, every parent & soon-to-be parent goes through this thought process at some stage. 

Childcare – understanding the basics

Since April 2017, the UK government has expanded childcare support through the Childcare Choices initiative, covering both employed and self-employed individuals. Previously, childcare support was mainly available to employed parents or those receiving benefits.

Under this scheme, for every £8 spent on childcare, the government contributes an extra £2. This applies to approved childcare providers, such as childminders, nurseries, nannies, holiday clubs, and after-school clubs.

Free Childcare Hours

Eligibility: Parents must work at least 16 hours per week for at least minimum wage and earn less than £100,000 annually.

Childcare Support in Scotland & Wales

• Scotland: 600 hours per year (around 16 hours per week) for 3 and 4-year-olds, with plans to expand.
• Wales: 30 hours of government-funded childcare for eligible 3 and 4-year-olds.
• Flying Start Wales: Supports families in disadvantaged areas with childcare, health visits and parental support.

Childcare costs

Even a minor income increment from various sources can result in a loss of tax-free childcare. Childcare costs¹ rise each year, and additional cost burdens for providers, such as the recent increase to National Insurance for employers, will compound this. 

Childcare Costs in England (2024 Data)

With fewer childcare providers available and costs continuing to rise, it’s more important than ever to claim any free childcare you’re entitled to, and that starts with understanding your Net Adjusted Income. Knowing where you stand financially also helps you explore other support options available to you and your family.

If your income is approaching or just over the £100,000 threshold, there are strategies to reduce your taxable income below this key limit. Doing so can help you retain your personal allowance and qualify for free childcare. However, each option has its own pros and cons, so it’s important to weigh them up carefully.

The main strategies to reduce your net relevant earnings (NRE) are: 

1. Charitable giving: See our recent article 6 ways to unlock the tax benefits of giving to charity >
2. Reduce working hours: Reducing working hours to bring income under £100,000, however, may be hard to agree with your trust, department or practice and may not be practical as it will result in a reduction in your net income, which you may need to cover living costs.
3. Utilise tax planning strategies: If self-employed or you have a limited company, you could work with your accountant or specialist financial adviser to explore strategies for reducing taxable income.
4. Salary sacrifice: For example, through an NHS car lease scheme. While this can help reduce your taxable income, it may trigger issues with your annual allowance, potentially resulting in a larger financial impact than simply losing your personal allowance.
5. Pension contributions: Tread carefully if you are a member of the NHS pension scheme and intend to make additional personal pension contributions to reduce your Net Relevant Earnings (NRE). The NHS pension scheme often uses a good deal of your annual allowance, leaving little or no excess available for additional contributions. Although reducing your NRE in this way could help regain your personal Allowance and/or your free childcare, you could create a more costly issue by breaching your annual allowance. It is vital you seek expert financial advice before proceeding. 

Final thoughts

Childcare costs are rising, and government support has limits, particularly for higher earners. Managing your Net Relevant Earnings has never been more important. Planning, considering tax-efficient strategies, and seeking professional advice can help mitigate financial burdens. If you’re affected, consult a financial expert to explore your options. 

At Legal & Medical, we’re here to listen, understand your needs, and help you build a tailored solution for you and your family’s future, so do get in touch.

Tax is dependent on your own circumstances and personal situation, and is subject to changes based on UK legislation and taxation regime. This article is based on our understanding of current legislation.

References
¹Childcare and early years provider survey, Reporting year 2024 – Explore education statistics – GOV.UK