Earning over £100,000 is a great milestone. But thanks to the tax rules, it can also trigger a massive financial headache.
If your income creeps even £1 over the £100k mark, you completely lose your tax free childcare and your free childcare hours. It is an absolute cliff edge.
To get these benefits, both parents usually need to be working and earning at least the equivalent of 16 hours a week at the national minimum wage. But if just one parent’s individual income crosses that £100,000 line, the whole family loses out.
Thankfully, you don’t have to ask your boss for a pay cut. By putting a bit more into your pension, you can lower your “adjusted net income” and keep your childcare perks safe.
Here are the dead simple steps to work out your adjusted net income and see if you need to top up your pension.
Step 1: Work Out Your Total Taxable Income
First, add up everything you earn. This includes:
- Money you earn from employment, including any bonuses or benefits.
- Profits you make if you are self employed.
- Any state benefits you receive.
- Pensions you are already drawing, including the state pension and private pensions.
- Interest on savings and pensioner bonds.
- Dividends from company shares.
- Any rental income from property.
- Income from trusts.
Make sure to take off any tax reliefs that apply to you, like trade losses or property loss relief. The figure you are left with is your initial “net income”.
Step 2: Take Off Gift Aid Donations
If you have given to charity using Gift Aid throughout the year, this lowers your income figure. You need to deduct the “grossed up” amount, which is what you paid plus the basic rate of tax.
In plain English: for every £1 of Gift Aid donations you made, take £1.25 off your net income.
Step 3: Deduct Your Pension Contributions
This is the big one. If you have paid into a pension scheme where your provider claims basic rate tax relief for you, you can take off the grossed up amount.
Just like Gift Aid, for every £1 you put into your pension pot, you deduct £1.25 from your net income. (Note: If your employer uses a salary sacrifice scheme, your pay is already reduced before you get it, so you don’t need to deduct it again.)
Step 4: Add Back Specific Reliefs
Finally, you can add back in any tax relief up to £100 for payments made to trade unions or police organisations for life insurance or superannuation. If you took this off in Step 1, add it back in now.
The Result
If your final figure is under £100,000, congratulations. You get to keep your childcare benefits, plus you have boosted your retirement savings at the same time.
You can apply for your 30 hours of free childcare over on the Gov website.
Need a Hand?
Tax rules change, and getting this calculation wrong by a few pounds can cost you thousands in lost support. It is always a good idea to consult a professional to make sure you are doing it right.
If you are hovering around the £100k mark and want to make sure your finances are as tax efficient as possible, get in touch. We are always here for a chat.
