Fiscal drag will push 55,000 working parents into the childcare tax trap, according to new analysis by the Centre for Economics and Business Research (CEBR).

The news comes after Chancellor Jeremy Hunt extended the 30 hours of free childcare provision to all working families with toddlers over nine months old.

Unfortunately for higher earners, this support is withdrawn when one parent earns over £100,000. This is also the level at which taxpayers lose their personal tax-free allowance.

Experts say this could see a 71% increase in parents feeling pressure to maintain a lower salary - and possibly not returning to work.

Childcare tax trap

The Institute for Fiscal Studies revealed that a parent with two young children earning £134,500 would be worse off than if they earned £99,000 due to the combined loss of support.

At present, there are 78,000 parents with children under four who earn £100,000 or more.

Because the £100,000 threshold is frozen and will not increase with wages, this number will rise to 133,000 by 2027-28, according to the CEBR.

Miles Grady, Director of Umbrella.co.uk said: “Jeremy Hunt’s extended childcare provision will be welcome news for most families, but this unintended consequence will almost certainly put some parents off work.

“This tax trap is more likely to affect flexible workers, who can charge higher rates for their skills and expertise, and who can increase or decrease their workload with relative ease.”

Matthew Lesh, from the Institute for Economic Affairs, said: “If the underlying goal with this childcare policy is to ensure parents, particularly mothers, get back into or stay in the workforce, there is a huge disincentive factor here that could undermine the whole enterprise.

“It will discourage people from working or from working hard, going for promotions and building up their skills over time. It could slow people’s career progression because they are fearful about falling over this threshold. The Government seems to be pretty much doing everything they can to sting the lower end of top income earners.”

For more information about flexible working and employment services for higher earners, speak to a member of the team today. Call: 01625 544 460.