High earning taxpayers are probably aware of the loss of the personal allowance which occurs when adjusted income exceeds £100,000, whereby the allowance of £12,570 is lost at the rate of £1 for every £2 by which income exceeds £100,000, resulting in the entire loss of the allowance at an income of £125,140. It is also at this level of income that the 45% additional rate of income tax starts to apply.
There is however another minefield potentially awaiting people with high incomes who are claiming the childcare allowance. This allowance was introduced in the Spring Budget of 2023 and is currently available to working parents of children aged 3 to 4 to cover bills from nurseries and other childcare providers for up to 30 hours per week, as long as (generally) both of a parent couple (or a single parent alone) earn at least the minimum wage rate for 16 hours per week. From April 2024, this will also be available for parents of 2 year olds.
The cost of 30 hours per week at a nursery can be as much as £10,000 per year, so the allowance is a valuable benefit which can be multiplied if there is more than one qualifying child.
However the allowance is not available for couples where one of the parents (or a single parent) earns more than £100,000 for the year, and some high earners will not know what their income will be until towards the end of the tax year where, for instance, they are eligible for bonuses or pay rises during the year. This means that parents might claim the allowance from the beginning of the tax year, but part way through the year they are awarded a bonus or pay rise which increases their annual income to over £100,000 and results in the childcare allowance being withdrawn and having to be repaid. It can be seen that the loss of the allowance would erode the benefit of the additional income, and possibly even exceed the after tax increase, making the parents actually worse off by receiving the increase. It makes no difference for a couple what the other partner earns for the year, so even if one has no income the allowance will not be available if the other earns more than £100,000, so it is possible for a couple earning £200k between them (£100,000 each) to claim the allowance, whereas another couple with a non-earning partner will be limited to total earnings of £100,000. Also there is no tapering of the loss of benefit – this is an example of a “cliff-edge” loss where earning £1 more than the £100,000 limit results in the loss of the whole allowance.
So if you are a high earner in receipt of child allowance, then you must take care to monitor the level of your income for each tax year. It is possible to mitigate a loss by making personal pension contributions (which reduce income for the purpose of the £100,000 limit), or using salary sacrifice and receiving employer pension contributions instead of salary, but the personal contributions must be paid to the pension company during the year concerned so the situation must be anticipated before the end of the year.
Author: Louise Berry, Tax Manager
Any views or opinions represented in this blog are personal, belong solely to the blog owner and do not represent those of Plus Accounting. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.
Date published: 20 February 2024