By Jessica Best, 8th March 2024
With today being International Women’s day and it being Mother’s Day on Sunday let’s talk about women’s wealth and how a pension contribution can help you retain your free childcare.
The UK government provides 30 hours’ free childcare for 3 and 4 years olds each year, on the basis that their parent or guardian household has at least £16,000 of annual income.
This tax-free benefit saves households with children thousands of pounds worth of childcare costs each year; to put this into perspective, Money Helper says the average cost of only 25 hours’ of childcare in the UK in 2023 was £7,210 Average childcare costs | MoneyHelper.
However, this benefit will be lost once either parent/guardian in the household has net adjusted earnings that exceed £100,000. Net adjusted earnings are total earned salaried income, self-employed income, some state benefits, dividends, pension, trust and rental income and savings interest. This is not to be confused with net income which is after tax.
What’s more, exceeding this £100,000 bracket, not only would you fully lose your entitlement to 30 hours’ free childcare, your income will also fall into the effective 60% rate of income tax because you will start to lose your personal allowance by £1 for every £2 of gross income above this limit.
Pensions are a really good answer to helping you retain these tax benefits, and you will also be helping future you.
Women are characteristically more likely to let their pension contributions suffer when caring for children because we are more likely to spend our money looking after others.
This is one of the main reasons we have a gender pension gap, which coincides with women being more likely to have time out of work and, therefore, miss opportunities for pay rises and subsequent increased pension contributions too.
In making a pension contribution your adjusted net income will reduce. You can take off the ‘grossed-up’ pension contribution value by £1.25 for every £1 contributed towards a pension. But what does this really mean?
When you make a pension contribution using taxed money, the government will automatically increase your pension contribution by 20% basic rate income tax relief, effectively giving you the tax back. As a higher or additional rate taxpayer the remaining 20% or 25% tax relief can be claimed through self-assessment.
Say for example, you have a salary of £92,500 and rental income of £22,500, your total net adjusted income for the year is £115,000. Meaning you lose your 30 hours’ free childcare and £15,000 of your income has fallen into the 60% income tax bracket. You could alternatively make a personal pension contribution of £14,400 from your bank account and then the government would automatically raise this by £3,600, to total a pension contribution of £18,000, resulting in your net adjusted income falling to £97,000 and all the tax benefits will be retained.
Be a little selfish, put some money into a pension for future you and make sure you can still get free childcare for your little one too.
The same principle can also be applied to child tax benefits. The UK government announced in Wednesday’s Spring Budget that the threshold for child tax benefit eligibility is increasing to £60,000 from £50,000 effective 6th April 2024, and the high income child benefit charge will now apply from £60,000 up to £80,000 and that this applies to earnings of both parents/guardians in the household individually. This means that child benefit is now only fully withdrawn if a parent/guardian has earnings above £80,000.
Making a personal pension contribution to reduce net adjusted income below £60,000 will mean the family will now receive the full child benefit. Alternatively, a pension contribution to lower net adjusted earnings below £80,000 will now mean the family can still retain some child benefit.
At the time of writing on Friday 8th March 2024, there is just under a month until the end of the 2023-2024 tax year on Friday 5th April and this means that you still have time to make a pension contribution up to the pensions annual allowance of £60,000 and benefit from these tax savings.
If you would like to discuss this opportunity further and see how a pension contribution can help your family, then please do get in touch: jab@mclarencapital.co.uk.
This article has been written as per current legislation of the 2023-2024 tax year.
Past performance cannot be seen as a guide to the future and returns can go down as well as up. This is for information only and you should seek tax advice in conjunction to any financial planning decisions you make.