Why just over £100,000 is the worst salary you can earn
Last week, Moneyreported on the plight of the Henrys — High Earners, Not Rich Yet — and how Britain's tax system leaves those earning £100,000 feeling the pinch.
Anyone earning above £100,000 a year after pension contributions (their 'adjusted net income') starts to lose their tax-free personal allowance of £12,570, at a rate of £1 for every £2 of earnings. It means those earning between £100,000 and £125,140 face a marginal tax rate of 60 per cent.
• On £100k and struggling: why it's hard being a Henry
At the same time, parents earning £100,000-plus lose 15 hours of free childcare a week and the government's tax-free childcare scheme, worth up to £2,000 a year per child.
We asked readers for their experiences of being caught in the £100,000 tax trap, and what they did to mitigate it. Here are some of your stories.
Louise Adams*, 46, an NHS consultant from southeast England
I've been an NHS consultant for about six years. My pre-tax income is about £105,000 after my NHS pension contributions. My professional memberships (I can deduct from my taxable income) cost me another £3,000, and then I pay a bit extra into a self-invested personal pension to get my adjusted income down to £99,500, to avoid that £100,000 cliff edge.
There's an awful lot of us in the same position. Pretty much anyone who's been appointed as a consultant in the past five years if they have children who are not yet at school will be in the same situation. If you have more than one child, it's even worse. It's one of the significant reasons for the waiting list and out-of-hours cover problems in the NHS, as it's not financially viable to do any extra shifts.
I'm a single parent with a three-year-old daughter, so all the costs and care fall on me. I get 30 hours a week free during term time for about 38 weeks a year, plus the tax-free childcare is worth another £2,000 a year.
I have someone who comes in at about 6.30am and looks after her until 7pm when I get home, then she goes to nursery two and a half days a week. Outside of the free hours, childcare costs me about £17 an hour, which totals about £40,000 a year. Frankly, I'm very lucky, I've got lots of family around and my parents also make contributions towards the paid-for childcare.
I would be paid £100 an hour for any extra shifts, or £125 if it were outside 7am to 7pm. But I would lose my personal allowance, I would lose free childcare hours and my tax-free childcare, and I would have to pay for childcare for my daughter when I was working. So it would cost me more money to work extra shifts than I would earn, it's bananas. During the recent strikes when I came in, it actually cost me money to help keep my department safe.
There are always extra unfilled shifts, someone might be ill, or there's a clinic on evenings and weekends in a bid to reduce waiting lists. More people would do those, but it's not financially worthwhile.
It's a slightly valid criticism that I shouldn't complain as much about childcare costs as I'm a single parent by choice, but it doesn't negate the fact that I would do more work and help the NHS out if the system didn't leave me worse off for doing so.
James Preston, 57, an occupational health doctor from north London
I'm not pleading poverty. I am in a very fortunate position. I'm single with no children, so I don't have the same financial pressures of some of my friends who have children and are still recovering from things like paying school fees.
But the £100,000 rule just feels like a cliff edge. The fact that the marginal rate goes up to 60 per cent and then comes down again feels unfair and arbitrary. I have no problem with being taxed proportionately if you earn more money, but there is already a system in place for that with the 20 per cent, 40 per cent and 45 per cent for the highest tax bracket. To lose the personal allowance that is given to everybody feels like you are targeting a very specific demographic.
I've had a salary just below the £100,000 mark, and when I was self-employed, I worked flat out to take my earnings above £100,000. If you earn over £100,000, you do just think: 'Why am I volunteering to add work to my diary if I am going to take substantially less in pay back home with me?'
I've definitely made a conscious decision in the past to not earn over £100,000 to avoid paying the marginal rate. It's a concern for me that this is a disincentive for people to work.
There is a shortage of people with skills and particularly marketable skills that command a higher income. It's a disincentive for these people who have the luxury to turn down work to keep under £100,000.
Erica Jackson*, 36, from southeast London, who works for a sustainable food company
We have one-year-old twins and because my salary is above £100,000, while my partner earns £70,000, we get none of the tax-free childcare benefits or the free hours from the government.
My children go to a childminder, who they love, for just three days a week. Our yearly childcare bill is still £24,800, and would probably be about £18,000 if we got the free hours and other benefits.
We are very fortunate, we earn well and I am really aware that there are lots of people in more difficult positions than us. But it shouldn't be one size fits all, and the £100,000 rule shouldn't be set in stone if you have two or three children going through childcare at the same time. I think it's unfair; we have friends earning £99,000 and they are much better off because they get the hours.
• Why a £2,000 pay rise can cost you £12,000
It's not just the childcare costs either — with twins, everything hits at the same time. For example, you can't buy a car seat and pass it down. You have to buy two at the same time, two high chairs, two cots. We just couldn't have any more children, absolutely not — the only way we could do it would be to wait until they were in school.
Because I earn £125,000 it means that I miss out on the full £12,750 personal allowance. I wasn't aware of these rules and when I was younger, I was just always pushing for a higher salary. I didn't realise it could get more difficult.
We rent at the moment and pay £2,400 a month to live in southeast London. We are trying to save for a home but we are now having to dip into these savings just to get by each month.
Philippa Henderson*, 39, from Hampshire
I'm frequently told: 'Just put anything over £100,000 into your pension.' But the reality is my pension is in good shape, and I need every penny of my income now. I have two young children, but because I earn £130,000 a year I have lost all my childcare allowances. At the same time, we've got a mortgage that costs us £3,500 a month and my commuting is £600 a month.
I'm the higher earner in my marriage, and it's annoying that if my husband and I both earned £90,000 we would pay less tax overall and still receive childcare help. I do not mind paying tax — in fact, I wouldn't want to live in a society where rich people get away with paying very little — but the £100,000 threshold is not the level of wealth it seems.
We do not have a flashy lifestyle. We drive a clapped-out old car and go to Cornwall once a year. We do have a cleaner but she recently dropped her hours because her benefits have gone up so she doesn't need to work as much. Meanwhile, I'm working 50 hours a week and paying for any help I can get.
I tell myself it's just a phase and it'll get easier when our children go to school, because we're going to be using a state school so at least that will be free.
Darren John, 57, a pension consultant from London
I now pay everything over £100,000 into my pension. I can't see a time when I'll ever take any pay greater than £100,000 as a salary. Working to pay 62 per cent of my income to HMRC is nonsensical.
What makes it worse is when you see the government and others suggesting it's not fair that we get higher rate tax relief on those same pension contributions, even though we feel obliged to make them. It's a vicious circle created by a ridiculous tax system. I certainly don't have any issue paying my fair share but a tax rate of nearly two thirds cannot be fair in any reasonable person's mind.
As an experienced pension consultant, I'm acutely aware of how we arrived in this position through successive governments, which makes me very cynical of the whole regime. Pensions are the one workaround, and these are now coming under attack by this government, which is greatly concerning. The temptation to move abroad is becoming an increasingly realistic option.
*Names have been changed
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