How you could Save ￡￡￡s as a (New) Parent

Clearly, some ways to save money as a parent are better known than others.

Take Child Benefit, for instance, where having your first or only child would allow you as a parent to claim for ￡25.60 a week (￡307.20 a year) and for every additional child ￡16.95 a week (￡203.40 a year) up to their 16th birthday. This is the full amount available should you and your partner have income of ￡50,000 or less.

What about the lesser known ways?

And what if one of you earn more than ￡60,000 a year?

With one of you earning ￡60,000 a year, this would mean you wouldn't be able to benefit from Child Benefit, and so understandably you might be looking for other ways to save ￡￡￡s.

Introducing Free Childcare

This is probably the most interesting way to save ￡￡￡s as a parent…

According the government, you can claim for annual support of:

• 15 hours a week free childcare if your child is 9 months to 2 years old
• 30 hours a week free childcare if your child is 3 to 4 years old
• ￡2,000 tax-free childcare if your child is 11 or under (paid in ￡500 instalments each year)

If we were to assume that childcare costs ￡10 per hour, we could be looking at ￡7,800 to ￡15,600 a year in support and therefore savings, with an additional ￡2,000 a year of tax-free support on top.

So a combined ￡9,800 to ￡17,600 a year in savings…

To be eligible, though, you and your partner must both have an income below ￡100,000 a year.

But what if you earn more than ￡100,000?

Well, through careful planning you could still benefit. Let’s take a look.

How to be eligible for free childcare?

The government have said that to be eligible, both you and your partner must have an ‘adjusted net income’ below ￡100,000 a year – what is ‘adjusted net income’?

Adjusted net income is total taxable income before any Personal Allowances and less certain tax reliefs, for example:

• trading losses
• donations made to charities through Gift Aid - take off the ‘grossed-up’ amount
• pension contributions paid gross (before tax relief)
• pension contributions where your pension provider has already given you tax relief at the basic rate - take off the ‘grossed-up’ amount

For most people, this means that should each of your earnings be more than ￡100,000, you can become eligible by contributing any spare cash you have to your workplace pension or to a personal pension elsewhere. This would only be cash you don’t need for the short-term.

Example

Let’s assume you earn a gross salary of ￡110,000 from your employer.

In your contract with your employer, you contribute 5% to your workplace pension which has been arranged to be made via salary sacrifice (i.e. the contribution is made before your income is taxed).

5% of ￡110,000 = ￡5,500

This would mean that ￡104,500 of your salary is left to be taxed and it would also mean your ‘adjusted net income’ is still above ￡100,000 – therefore you remain unable to claim for childcare support.

How do we get this figure down?

By making a gross contribution to your pension (i.e. cash from a bank account, plus the Basic Rate tax relief that HMRC add on-top), with the gross amount being equivalent to the figure required to get ￡104,500 to below ￡100,000:

￡104,500 – ￡99,999 = ￡4,501

￡4,501 is the gross amount you would need to contribute to your pension and so the amount to contribute from your cash account would be ￡3,600.80.

You’re Now Eligible!

So now you’re eligible for the childcare support to save thousands of pounds each year.

There’s more savings to be made though…

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Additional Savings made by Contributing to your Pension

So not only do you see more pounds in the pocket each month thanks to the childcare support.

You now also see a little bit more each month because you reclaimed some of your Personal Allowance – this was partially tapered by your salary going over ￡100,000. When that happens, you personal allowance is tapered by ￡1 for every ￡2 you earn over ￡100,000. Here’s the maths if you’re interested and to remove a rounding error let's say you contribute ￡4,500 gross to your pension:

￡4,500 / 2 = ￡2,250

￡2,250 of your income was effectively being taxed at 60% = ￡1,350

Now it is being taxed at 40% instead = ￡900

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So that’s ￡450 saved because of retaining your personal allowance.

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You then have income tax relief:

• The Basic Rate relief (20%) equals to ￡900 a year – ￡4,500 x 20% = ￡900 saved
• You can also claim for Higher Rate relief (40%) – this also equates to ￡900 saved (as by this point you have just received the initial half of the Higher Rate for income tax and now just need the second half)

The former is added to your pension and the latter you would claim via self-assessment.

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Total Savings? ￡12,050 to ￡19,850 (assuming ￡10/hour for childcare)

Here’s the breakdown:

• Savings made from childcare support - ￡9,800 to ￡17,600 a year
• Savings made from Basic Rate tax relief added to your pension contribution - ￡900
• Savings made from reclaiming your Personal Allowance - ￡450
• Savings made from Higher Rate tax relief by making your pension contribution - ￡900

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Do you think you are eligible and would like to claim? Or do you think you could become eligible after making additional pension contributions?

Then here are the links to apply. I must stress that it would be best to seek advice first if either you or your partner?earns more than ￡100,000, as you wouldn’t want to unknowingly make a fraudulent claim!!

Apply for free childcare if you're working - GOV.UK ( www.gov.uk )

Tax-Free Childcare - GOV.UK ( www.gov.uk )

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SJP Approved 22/07/2024

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