How you could potentially 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 16^th birthday. This is the full amount available should you and your partner each earn £60,000 or less.

What about the lesser known ways?

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

With one of you earning £60,000 a year, this would mean Child Benefit wouldn’t be available for you to claim, 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…

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 your 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 join your workplace pension scheme through 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 an additional contribution to your pension, 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 additional amount to contribute would be £3,600.80.

You’re Now Eligible!

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

There’s more savings to be made though…

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. The savings here would equate to £900 a year.

£4,500 / 2 = £2,250

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

Now it is being taxed at 40% instead = 900

So that’s £450 saved.

*The effective income tax rate for individuals with adjusted net income between £100,000 and £125,140 is up to 60%  This is because in addition to paying up to 40% tax on any income above £100,000, there is the impact of losing some of all of the personal allowance and paying 40% tax on that income too as reducing the personal allowance by £1 for every £2 over the threshold means an additional effective rate of income tax of up to 30%.

And then finally, because you’re someone with a salary in the Higher Rate income tax bracket, you can also claim for higher rate income tax relief too. This equates to £1,200.26

£3,600.80 / 0.75 = £4,801.06

£4,801.06 - £3,600.80 = £1,200.26

Total Savings Made – £12,350.46 to £20,150.46

Here’s the breakdown:

• Savings made directly from childcare support - £9,800 to £17,600 a year
• Savings made from Basic Rate tax relief added to pension contribution - £900.20
• Savings made from reclaiming Personal Allowance - £450
• Savings made from Higher Rate tax relief by making pension contribution - £1,200.26

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)

Please note that clicking a link will open the external website in a new window or tab. Links from this post/website exist for information only and we accept no responsibility or liability for the information contained on any such sites. The existence of a link to another website does not imply or express endorsement of its provider, product or services by us or St. James's Place.

The value of a pension will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested. 

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances. 

Please note that anything over the basic rate of tax must be claimed via the individual's tax return.