It’s been the case for years that government entitlements have provided low-income families with a higher standard of living than those earning substantially more.
But, as we pointed out in 2010 and 2012 that ‘benefit’ can backfire as “work is punished.”
“the single mom is better off earning a gross income of $29,000 with $57,327 in net income & benefits than to earn gross income of $69,000 with net income and benefits of $57,045.“
Fast forward to the pandemic, and we find that the $2.2 trillion 2020 CARES (Coronavirus Aid, Relief, and Economy Security) Act left many employed Americans making less than their unemployed counterparts.
For minimum wage and low wage workers the difference between what they are being paid to work and would receive on unemployment is no doubt the most crushing. Many struggle to pay their bills as is and receive no benefits to complicate the equation. While they are dodging coughs and bringing in masks from home for $10 an hour, others who made the same money are now being paid to sit safely at home.
Now, the same thing is happening in the UK, where getting a raise could leave one thousands of pounds poorer.
Welcome to the childcare cliff, a policy anomaly so irrational that a mere £1 pay rise can leave parents worse off by tens of thousands.
This September, the government’s expansion of free childcare in England – offering 30 hours of weekly care for children under three – was meant to ease the burden on working families. But for any household where one parent earns more than £100,000, this support vanishes entirely.
It’s a line drawn in concrete.
Earn £99,999? Full benefits. Earn £100,000? You lose thousands.
A 50% Raise Just to Break Even
According to new analysis from the Institute for Fiscal Studies (IFS) cited by the Financial Times, a London-based parent with two young children would need to earn over £149,000 just to break even vs. a colleague earning £99,999 who receives full childcare support. That’s a nearly 50% raise required simply to stand still.
And the system doesn’t stop there. As soon as you hit six figures, the personal allowance – the first £12,570 of tax-free income – begins to taper off. Combined with other clawbacks, this creates an effective marginal tax rate of 60% for earnings between £100,000 and £125,140 (and is even higher in Scotland).
In practical terms, this turns a middle-class promotion into a financial landmine.
Parents Penalized for Working
The result is both absurd and tragic: professionals across the country are turning down promotions, cutting their hours, and abandoning second children altogether – not for personal reasons, but because the math just doesn’t work.
FT reader Davina (name changed to maintain anonymity), a finance worker and mother of two, has dropped to a four-day workweek just to remain eligible for childcare benefits. “This year, we are £250 per month better off as a result, although I know that going part-time has affected my promotion prospects,” she told FT, adding “I feel bad for complaining, as we aren’t poor, but we’re still spending £2,750 per month on childcare even after the government help, and the reduction in my take home pay means we can’t afford holidays or a car.”
Others are stuffing bonuses into pensions just to stay under the line—sacrificing near-term cash flow for long-term retirement savings they can’t touch for decades.
‘Rob,’ a tech worker, rejected two promotions to avoid the cliff. Eventually, he quit to become a contractor, sacrificing stability for income he could control. He and his wife made a brutal decision: they won’t have a second child.
These aren’t isolated cases, they’re rational responses to irrational policy. One FT reader had to pause fertility treatment after a modest raise triggered thousands in unexpected taxes.
Others are gaming the system with salary sacrifice, electric vehicle schemes, and leave-buying tricks. Some have gone self-employed, precisely to limit taxable income. And across sectors, women are disproportionately going part-time, often doing full-time work for part-time pay just to preserve childcare support.
In the NHS – where long hours and defined-benefit pensions make income unpredictable, the effects are especially damaging. Consultants are turning down shifts to stay below the threshold. Some doctors, including those in cancer care and psychiatry, say they can’t afford to work more.
“I am a hospital consultant, and feel trapped by this,” another person (‘Martha’) told the Times. “I have tried to put as much as possible into my NHS pension, but I am really worried about what my tax bill is going to be next year. I can’t take on any extra work for the NHS because it would penalise me too much.”
Fiscal Drag Becomes Fiscal Punishment
The £100,000 threshold was set in 2017. It hasn’t moved since. Had it tracked inflation, it would now sit above £130,000. But instead, more than 1.8 million taxpayers now fall within range, with that number expected to climb as frozen thresholds and rising salaries collide.
This stealth taxation – known as fiscal drag – helps Chancellors raise billions without raising headline rates. But it creates cliffs, not curves, and encourages less work, not more.
IFS economists say that by 2028, 2.2 million people will fall into this trap, facing both the childcare cliff edge and the personal allowance taper.
Fixing this mess wouldn’t be cheap, but it wouldn’t be unaffordable either. The IFS estimates that scrapping the childcare cliff edge entirely would cost a few hundred million pounds – a rounding error in the national budget.
The true cost of inaction, however, is likely far higher: lost productivity, lower tax receipts, stalled careers, and family planning decisions dictated by HMRC.
Dan Neidle of Tax Policy Associates is blunt: “This is what happens when successive governments try to hide the real tax rate with tricks. What started as a small anomaly is now a serious problem.”
The political calculus is simple: it’s easier to complicate the lives of a few high earners than face the wrath of the many.
But as this broken system snares more and more working families, inaction is becoming a choice with economic—and human—costs.
Tyler Durden
Mon, 04/14/2025 – 06:55
