‘Tax cliff edges' for childcare raise doubts on growth strategy

Times

19-05-2025

Parents are restricting their salary growth in a blow for Rachel Reeves, according to new figures seen by The Times.
Freedom of Information requests to HMRC, covering six years of salary analysis, suggests people are increasingly sitting under the key earnings thresholds for fear of obstructive marginal tax rates.
Free hours and tax-free childcare stop abruptly when one parent earns £100,000, while child benefit was restricted, until last year, at the £50,000 limit. The latter figure was increased by Jeremy Hunt, the former chancellor.
The figures raise questions about the government's approach to increasing growth from pay, with parents bunching their income in a £3,000 range under tax cliff edges in order to keep childcare advantages. In many cases, all help with childcare costs would be lost by a parent earning a penny over the cap.
Nearly 1 million taxpayers sit just below the higher-rate tax bracket of £50,271, an increase of more than 50 per cent compared with five years ago. This is where child benefit was curtailed until April 2024. The benefit now starts to fall when a parent earns £60,000 on a sliding scale to £80,000 a year.
For people earning close to £100,000 the penalties are even more stark. The new analysis shows another leap in the amount of people sitting just under this tax threshold. When breached by one parent, they no longer receive free nursery hours (for children aged nine months to three) or tax-free childcare.
Childcare costs peaked at more than £15,000 a year in England last year but have since fallen with the expansion of free nursery hours for children over nine months old. The expansion was not followed in Wales and Scotland, where costs for younger children are now more expensive than in England. Tax-free childcare is worth up to £2,000 per child each year.
The Times figures reveal for the first time the extent to which parents and higher earners are reducing their earnings, because of the penalties combined with the freeze in tax thresholds, also known as fiscal drag. It results in some parents having to earn tens of thousands more before the tax system makes it worthwhile to lose the childcare help.
The data shows a large dip in the numbers of taxpayers in the brackets immediately after the cliff edges, emphasising the work being done by parents to keep incomes lower. This could come in the form of extra private pensions payments or simply not accepting pay rises or promotions.
The Centre for the Analysis of Taxation (CenTax) said the policy against parents was hugely costly for everyone and 'cuts strongly against the government mission to support growth'.
'When getting paid more actually loses you money, because of the withdrawal of childcare, it is no surprise that people find ways to hold their taxable income down,' Dr Arun Advani, director at CenTax and associate professor of economics at The University of Warwick, said.
'Some of that will be payments to charity or into a pension, while others will choose to work part-time or turn down a stressful but lucrative promotion.'
Justine Roberts, the founder and chief executive of Mumsnet, said that parents were too often turning down promotions or cutting their hours due to the system. She believed the findings also highlighted the importance of government support.
'Many Mumsnet users feel that a tapered cut-off would make more sense both for families and for the economy, rather than a blunt tool that forces parents to work less so that childcare is more affordable,' Roberts said.
A spokesman for the Department for Education said: 'The overwhelming majority of parents earn less than £100,000 and too often it's the most disadvantaged families who miss out on the support they need. Fixing this is a government priority.'