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Tiny salary bump could strip workers of thousands in income

How a £1 pay rise could cost you £14,000: Tiny salary bump could strip workers of thousands in income due to ‘ridiculous complexities’ in tax and benefits system

  • Analysis by stockbroker AJ Bell revealed a £1 pay rise could cost you thousands 
  • If a parent’s salary rose to £100,001 they would lose out on child care allowances
  • There Government provided 30 hours of free child care would also be halved  

A tiny bump of as little of a £1 more each year could result in workers losing thousands of pounds in income due to ‘ridiculous complexities’ in the tax and benefits system.

In the worst possible outcome, a person could end up losing £14,000 if their salary was increased by £1 this year.

This is because they would no longer be eligible for tax breaks and childcare allowances.

Analysis from stockbroker and investment platform AJ Bell, revealed a worker with three young children would be wealthier if they rejected a slightly higher pay offer of more than £100,000 a year.

A tiny bump of as little of a £1 more each year could result in workers losing thousands of pounds in income due to ‘ridiculous complexities’ in the tax and benefits system

The analysis, published in The Telegraph, showed that such taxpayers would lose thousands per child once their salary increased to over £100,000.

This is because once parents reach this salary, it pushes them into a higher tax threshold, resulting in the loss of tax-free childcare, up to £2,000 per child.

The amount of Government provided free childcare the parent would be entitled to would also be slashed from 30 hours free to 15 hours.

Those living in England with a child aged three to four-years-old are entitled to 30 hours of free childcare so long as it’s with an approved childcare provider and the funding stops when the child starts reception. 

AJ Bell said this would cost the parent an estimated extra £7,952, resulting in the taxpayer to pay for additional childcare which could cost £13,952.

Head of personal finance at AJ Bell Laura Suter said those who are hit by higher tax margins should look into making larger pension contributions in an attempt to avoid crossing the £100,000 threshold

This was based on the Coram Childcare report’s estimated costs of the hourly rate of childcare for those living on the outskirts of London.

On top of reduced childcare allowances, those earning between £100,000 and £125,140 would see their tax-free personal allowance of £12,570 become weaker at a rate of £1 for every £2 earned, the Telegraph reports.

This means that a taxpayer earning just under £100,000 a year who is given a £1,000 increase on their salary will then lose £400 to income tax and an extra £500 from their personal allowance, being taxed at 40 per cent.

The tax bracket increase would be mean £600 of the £1,000 pay rise would be lost, with National Insurance payments increase of two per cent.

If the individual had a student loan, these repayments would be ramped up to nine per cent.

Even if one parent earns just £1, the threshold at £100,001 and the other parent does not work, the family would not be entitled to the £2,000 in free childcare.

If one parent earns just £1, the threshold at £100,001 and the other parent does not work, the family would not be entitled to the £2,000 in free childcare

However, if both parents were earning £1 under the threshold, at £99,999, they would still be entitled to free childcare.

Head of personal finance at AJ Bell, Laura Suter said: ‘The tragic thing is that many parents won’t be aware that they have fallen foul of the rules until the taxman comes knocking, landing them with a tax bill for thousands.’

She said the analysis revealed the ‘brutal flaws’ and ‘ridiculous complexities’ in Britain’s tax system, adding that those who are hit by higher tax margins should look into making larger pension contributions in an attempt to avoid crossing the £100,000 threshold.

By doing this it will mean workers will not lose their entitlement to tax-free childcare or free childcare.

Ms Suter added: ‘People who are self-employed through their own business may want to consider whether they pay themselves a lower salary, so they stay under the threshold, if that’s financially practical.’

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