Finding the right full-time nursery or preschool place that suits your family’s needs is stressful enough – and then you find out how much childcare will cost!
On average, part-time childcare (25 hours per week) costs around £7,729 per annum, and full-time provision is a little under double that figure1 and rising, so the 30 hours of free childcare offered by the government can make a significant difference to the family budget. However, if your partnership profits have grown, or your partner has had a much-deserved pay rise that takes you over £100,000, you could be at risk of losing those free childcare vouchers.
Who qualifies for free childcare?
If you (or your partner, if you have one) work at least 16 hours per week, you may be eligible for 30 hours of free childcare if you live in England and your child is 3 to 4 years old.
- The childcare must be with an approved childcare provider.
- The childcare would stop when your child starts in reception class or reaches compulsory school age if this is later.
- You can get 30 hours of free childcare per week for 38 weeks of the year (during school term time).
- You may be entitled to free childcare for 52 weeks if you use fewer than 30 hours per week.
- The scheme offers up to £2,000 per child per year towards childcare costs, including nursery and childminders.
- You/you both have an adjusted income of less than £100,000.
It doesn’t matter if your joint income is more than £100,000. So, for instance, if you both earn £90,000 pa, you would still qualify for childcare vouchers. You only lose the free childcare if your individual income tips over £100,000! Once you account for your childcare costs, you could be worse off.
How do I work out if this affects me?
The key phrase here is ‘net adjusted income’. Net adjusted income is your total taxable income after gross pension and gift aid contributions are factored in. I’ll come back to how this can help you in a moment.
First things first…start by working out your net income, this will be a total of:
- money you earn from employment (including any benefits you get from your job)
- profits you make if you’re self-employed
- most pensions (including the state pension, company and personal pensions and retirement annuities )
- interest on savings
- dividends from company shares
- some rental income
- income from a trust
Once you have totalled all your earnings and the figure for either you or your partner is in excess of £100,000 – what can you do?
Ways to avoid losing your childcare vouchers
Working less may not be an option if you want to progress in your career. However, working less would, of course directly affect your income.
Also, depending on your membership of the different sections of your NHS pension scheme and how near you are to retirement, there will be an impact on your retirement benefits of earning less during your career due to these sections’ best of the last 3 years or best 3 in the last 10 years income rules. But there may be better ways that benefit you more while maintaining your career goals.
Make a pension contribution
This option makes use of the definition of ‘net adjusted Income’. By making a pension contribution, you lower your net adjusted income. This hasn’t been a possibility for many doctors and dentists in recent years due to the annual allowance restrictions and fear of breaching leading to a tax liability. However, since the expansion of the annual allowance breach rules now being over £60,000 pa there may be scope for some to make additional pension contributions. Do tread carefully for fear of miscalculating and causing expensive annual allowance tax charges. This option is easier to utilise if you or your partner are the one breaching £100,000 and are a non-NHS medic or dentist.
Net income of £105,000
Gross personal pension contribution of £6,000 (you pay £4,646.40 net of basic rate income tax and claim back the rest of the higher rate tax relief through your self-assessment)
A net adjusted income of £99,000 means you retain the 30 hours of free childcare and you have added to your savings for retirement.
Gifts to charity
Gifts to a registered charity that are provable and have attracted gift aid can be used to reduce your net adjusted income. However, unless you fall just over the £100,000 mark, it could take a considerable charitable gift to make any marked difference.
You donate £100 to charity – they claim 20% from HMRC to make your donation £125. You pay 40% tax, so you can personally claim the other £25 from HMRC.
To be clear, any actions taken to reduce your income, for whatever reason, should be approached with great care.
Before taking any steps, you must fully understand your income and the knock-on effects actions to reduce your income have, as these effects are far-reaching, including dictating the maximum figure you can borrow with a mortgage in the future.
As with all complex financial decisions, it is best to take expert advice before acting.
This article should not be interpreted as specific advice. As always we would urge you to contact one of our specialist advisers who will look at your circumstances before advising.
Are you at risk of losing your childcare vouchers? Let us know by adding a comment below.