Working parents face 'cliff edge' as childcare tax trap causes 'absolutely insane' financial penalty
The £100,000 income limit was introduced in 2017, when tax-free childcare and free childcare hours began
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Working parents face losing their entitlement to tax relief once hitting the £100,000 income mark which could force them to cut back on their hours.
These parents face an “absolutely insane” financial penalty if they earn just £1 above the £100,000 threshold as the tax system does not work in their favour, a new report suggests.
Stuart Adam, a senior economist at the Institute for Fiscal Studies (IFS), said parents faced some of the “maddest” tax cliff-edges in Britain once their income climbs above the threshold.
Mr Adam criticised Jeremy Hunt’s decision to withdraw all free childcare entitlements and tax-free subsidies for working parents after they start earning £100,000.
The income limit creates a cliff-edge, with individuals earning exactly £100,000 retaining their entitlement to tax relief and their family’s entitlement to free childcare, whereas those earning just £1 more lose both.
It also applies where just one parent exceeds the income limit, meaning a household with one parent earning £100,001 is no longer entitled to support, but a household with two parents each earning exactly £100,000 retains its entitlement.
People who earn six-figure sums can have their tax-free personal allowance clawed back by HMRC
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The IFS has calculated that it means a parent with two children earning £134,000 could be worse-off than someone earning £99,000.
The £100,000 income limit was introduced in 2017, when tax-free childcare and free childcare hours began, and has never been increased.
The Tax Law Review Committee (TLRC) warned Jeremy Hunt’s countless tax traps are ruining any incentive for parents to continue to working as even a pay rise could see a working parent earning less.
People who earn six-figure sums can have their tax-free personal allowance clawed back by HMRC.
This pushes up their marginal tax rate – or the tax paid on every extra £1 of income – to 60 per cent a day, leaving them facing marginal tax rates of 60 per cent on every extra £1 of income.
Dan Neidle, founder of Tax Policy Associates, criticised the policy saying: “A cliff-edge seems an understatement of a description.
“It’s an abomination, there’s no place in the tax system for that. And to say that eliminating it is regressive or giving money to the wealthy is the wrong response.
“If we have a tax on beards and we abolish it, the fact that rich people are benefiting is irrelevant.
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"The tax is stupid. That is an equally stupid piece of policy.”
He explained that those who he knew that were caught in the childcare tax trap started to turn away from work.
Mr Bill Dodwell, the former head of the now disbanded Office for Tax Simplification (OTS) said people on benefits should be incentivised to work more hours without being penalized.
They are turning away workplace promotions, they make additional pension contributions they don’t really want to make, he said.