A little-known tax trap has emerged as a significant financial burden for high-earning couples in the UK, particularly affecting those in the technology sector like Matthew and Nicole Griffiths.
Despite both having six-figure salaries, the couple is feeling the pinch of a steep 62% tax rate, causing them to lose child benefits and suffer from increased childcare costs.
With children’s services out of reach due to the £100,000 earnings threshold, the Griffiths family is just one example of how the UK’s tax system inadvertently penalizes its top earners leaving them unable to benefit from the support intended for parents struggling with childcare costs.
The situation highlights a wider issue faced by many working families trying to balance high-paying jobs with the exorbitant cost of raising children.
The Hidden "Tax Trap" at £100,000
The threshold of £100,000 has become a crucial point in the UK's tax system, but it’s not a break-even point. Instead, it triggers the loss of several vital government benefits, creating a "tax trap" for many high earners.
For Matthew and Nicole Griffiths, earning £125,000 and £100,000 respectively, their income places them firmly above this limit, but it also leaves them ineligible for crucial financial support.
Despite being among the top four percent of earners in the country, they face a marginal tax rate of 62% due to the withdrawal of the personal allowance, as well as the loss of child benefits.
For families like theirs, the tax system leaves them feeling less wealthy than they appear on paper.
Childcare Costs and the Struggle to Afford a Third Child
The Griffiths family’s decision to start a family in 2021 came with unexpected financial challenges. Although both parents had lucrative careers in the tech sector, their combined earnings meant they received no government assistance to cover childcare costs.
For example, Matthew estimated that their annual childcare expenses reached around £19,000 for their first child. When their second child arrived, this figure doubled to nearly £40,000, pushing the couple to re-evaluate their financial strategy.
Unable to afford a third child, they are left in a bind, caught between a steep tax burden and soaring childcare costs that undermine their ability to grow their family.
The 62% Marginal Tax Rate
The UK’s tax system introduces a steep penalty for earners above the £100,000 mark. The personal allowance, which is the portion of income not taxed, is reduced by £1 for every £2 earned above £100,000, disappearing entirely once an individual reaches £125,140.
This creates an effective marginal tax rate of 62% for earners in this range, meaning they are taxed at over half of their income for the amount earned above £100,000.
This tax burden, combined with the loss of child benefits and childcare support, makes the UK tax system particularly burdensome for families in the middle and upper-income brackets.
The Loss of Child Benefit and Childcare Support
One of the most significant challenges families like the Griffiths face is the loss of child benefit and other state-subsidised services once they pass the £100,000 earnings threshold. Child benefit, which is a key form of financial assistance for families, starts to taper off at £50,000 and is completely withdrawn once household income reaches £60,000.
This becomes an issue for families who, despite earning high salaries, are unable to afford the escalating costs of childcare.
The Griffiths, for example, found that once their income exceeded £100,000, they not only lost child benefits but also became ineligible for the free 30 hours of childcare weekly, a significant reduction from the 15 hours available to them after their children reached three.
How High Earners Can Mitigate the Tax Burden
Matthew Griffiths, in an effort to alleviate the financial strain, looked for ways to reduce his taxable income. One approach he found useful was contributing more into his pension through his employer's salary sacrifice scheme.
Although this did not fully alleviate the 62% tax rate, it did offer some relief by lowering his taxable income. Additionally, for those who are self-employed, like contractors, there is the option to lower salaries and take dividends through a limited company, which are taxed at a lower rate.
However, Griffiths acknowledges that this strategy may not be available to everyone, especially those employed in the public or private sector, making it an impractical solution for many families.
The Impact on Small Businesses and the Broader Economy
The tax system’s effect on parents’ ability to afford childcare also has broader implications for the economy. Kate Underwood, a small business owner, pointed out that tax-free childcare is vital for many working parents.
Without this support, parents will be less able to afford the cost of childcare, forcing them to reduce work hours or stay home entirely. This not only hurts businesses in need of skilled workers but also undermines the government’s stated goal of encouraging higher employment levels.
For small businesses like Underwood’s, the loss of working parents’ flexibility can have a significant impact on their operations, leading to staffing shortages and reduced productivity.
Final Summary
The "£100,000 tax trap" forces families to make tough financial decisions regarding childcare and family growth.
The system’s impact is felt more by those in the middle and upper-income brackets, highlighting the need for reform.
