This week I learned that our local nursery charges parent using a Pay-as-you-earn childcare fee system.
This means that the more you earn, the more you pay for childcare. Pay as you earn childcare, where the higher income parents subsidize the lower income parents’ kids. Lenin would be proud.

Initially, I thought our local nursery had gone mad. Then, Lazy FI Mum pointed out that when she looked at other nurseries in our area, they did the same! After some digging, we realised it is a Hackney (our local council) policy. Apparently, our council has gone mad.

Today, I’d like to go through the advantages, disadvantages, and issues with the benchmarks. Finally, we’ll conclude (TL;DR- it’s a crazy idea that makes zero sense to me).

What is pay as you earn?

Pay-as-you-earn is a system where you pay for something based on your income. The most common one is the income tax. With income tax, two different individuals will pay a different amount (and sometimes a different rate) based on their income.

It is very rare to see a pay-as-your-earn system with products and services. That’s why I was so surprised to find out that most of our local nurseries are actually pay-as-you-earn childcare.

So, let’s see how our council’s pay-as-you-earn childcare is priced.

Pay-as-you-earn childcare price list

We, the Lazy FI Family, live in Hackney, London.

You can find the full price list here:

Childrens Centre Nursery Fees.pdf (hackney.gov.uk)

I want to focus on full-time care for ages 0-2.
The main reason is that our daughter goes full time (and our son will as well). Besides that, after the age of 3 (roughly), you start getting free hours and it’s less of an issue.

So, in Hackney, full-time care for ages 0-2 costs (from 01/09/2022):

A few things jump out from this table:

1. They missed anyone earning £54,000-£55,000 and £99,000-£100,000. I doubt these ranges grant you free childcare but it is interesting to know how much the fee would be for a family earning £54,500 or £99,500.
2. The jumps are quite significant, especially once you go over £100,000 household annual income.
3. Once again, it’s a pay-as-you-earn childcare fee structure. The more you earn, the more you pay.
4. How do you determine household annual income? is it taxable income? is it the base salary (before bonuses and pensions)? maybe it’s net pay? I couldn’t find the answer, I’ll assume it’s the base salary.

As a reminder, as long as you and your partner earn less than £100,000 a year (each!), get the government to cover up to £2,000 of this cost each year. For more details, read my post about tax-free childcare:
Tax-Free Childcare: Free £2,000 a year from the government – Lazy Fi Dad

Disadvantages of Pay-as-you-earn childcare

Same product or service

There is no logical reason that I can think of for paying more for the same product or service.

When you hire a cleaner, get on the bus, or buy groceries- do they ask to see your payslip and charge you based on your earnings?

Of course not, if you receive the same product or service, it makes sense that we all pay the same.

Will a band 4 child (a child whose parents earn £70k-£99k) get more attention than a band 2 child (whose parents earn £34k-£54k)? Of course not, that sounds horrible, I would not want to send my children to such a place. However, if that’s not the case, why do some parents pay more than other parents if they receive the exact same product?

Penalising success

I hate anything that discourages success. By having a pay-as-you-earn childcare system, you are penalising higher-earning parents. This can discourage parents from earning more and I’m against that.

Don’t believe me? skip to the “anomalies” part below.

Sharing payslips

I don’t want to share how much I earn with other people in my neighbourhood (even if they run the nursery) and I shouldn’t have to. The only people I share my payslips with are HMRC (I have to), my wife (Lazy FI Mum), and my mortgage provider.

The mortgage provider is an interesting example because they have a good reason to see my payslips. The mortgage provider wants to know that I can pay back what I borrowed, that’s fair enough.

If our local nursery/council wanted more security about payments, I would happily pay 2-3 months in advance if needed. However, as you can see by the fee structure, that’s not the case.

I hate forced sharing

Let’s assume you worked really hard at your job and got a promotion and a raise, congratulations.

How much of that raise is due to the nursery/council? If you said “nothing” then why should they get part of it? While you got a raise, you now have to pay them more. Don’t get me wrong, if you WANT to pay them more, go ahead, you can always donate money to them or any other cause you like. Forcing you to do so is unfair and very un-capitalist in my opinion.

Anomalies

Not only does pay-as-you-earn childcare force you to share your raise, but sometimes they take more than your raise!

Example 1

Meet Lazy FI couple. They each earn £27,000, so their household income is £54,000. Therefore, they pay £12,064 a year for childcare as they fall into band 2

Now, one of them got a raise of £2,000 raise, congratulations! As the marginal tax rate for that earning level is 33.35% (20% income tax and 13.25% national insurance), their net increase is only 66.75% of £2,000, or £1,335.

However, this raise pushed them into band 3. Their childcare cost just increased by £1,560. Not only did the nursery/council take all that raise, but Lazy FI couple is also now £235 worse off each year.

This creates an absurd situation where one of the parents should go to their employer and request a salary reduction! Sounds ridiculous? it is! I hope you see why I said earlier that this system penalises success.

Example 2

Meet Lazy FI couple from a parallel universe. One of them earns £39,000 and the other earns £60,000, so their household income is £99,000. Therefore, they pay £15,210 a year for childcare.

Now, the one that earns £60,000 got offered a promotion that comes with an £8,000 raise. That kind of raise would probably come with additional responsibilities. Would you take that promotion? Let’s look at the numbers.

The person who got a raise will now earn (gross) £8,000 more but the marginal tax at those levels is 43.25% (40% income tax and 3.25% national insurance). Their net increase is only 56.75% of £8,000, or £4,540. However, their childcare cost just increased by £5,304. The nursery/council takes all that raise plus an extra £764 a year.

Now, would you take that promotion? I wouldn’t**.

Once again, this is an absurd situation which forces you to share (sometimes more than 100% of) your pay raises with the nursery/council.

arguments in favour of Pay-as-you-earn childcare

“I’m not sure what you’re complaining about, it’s just like income tax”

First of all, it’s not. With income tax, you never end up with less money due to a raise. Your marginal tax rate is, well…marginal. You only pay the higher rate for anything earned above the rate’s threshold.

I know some people get this wrong so let me repeat that once again- With income tax you NEVER end up with less due to a raise. If you’d like a more detailed explanation about this, leave a comment and I’ll write a separate post about this.

Second, tax is a legal requirement and everyone is charged, here it’s just the parents that get charged extra, not everyone.

In case you were wondering, I favour lowering taxes and the government’s involvement in our lives and finances.

Third, income tax is charged on a national (country) level. The UK doesn’t have an income-based local (council) level tax. If the UK want to implement the American method (where you have Federal and state taxes), go ahead and implement it fully. Don’t select random services and apply the pay-as-you-earn method to them.

You’re subsidizing less fortunate kids

While the idea of helping the less fortunate kids sounds nice and magical, that’s not the case.

If this sounds like a nice idea to you and your childcare doesn’t operate that way, let me ask you a question (thanks to GekkosGhost from Reddit for asking this question originally here when I raised this issue):

How many kids in your local nursery do you sponsor or have you sponsored?

If the answer is “none”, then that idea only sounds nice to you when it’s done with other people’s money.
If you have sponsored kids I have two things to say to you:

1. You are an amazing person, no sarcasm here whatsoever.
2. That is your right, you choose which causes to donate your money to and that right should be given to all of us, we shouldn’t be forced to do so.

In addition, there are a lot of things that the government and local council do with our taxes that I disagree with and that’s fine (pun unintended), they can’t please everyone.

However, if childcare is something our local council priority- fund it via the council tax, which can be increased if needed. By using the pay-as-you-earn childcare system, they are essentially only charging other parents for that. That sounds very peculiar to me and I just don’t get it.

Pay-as-you-earn childcare- Summary

Anyway, that’s my rant for today. Let me know if this happens anywhere outside Hackney.

I also want to thank the people on the FIREUK subreddit that helped give me some ideas and confirm how crazy this idea is, you can read the thread here:

Childcare cost dependant on income?! : FIREUK (reddit.com)

Finally, a few clarifications:

• I don’t think this is a new thing with Hackney, I’m almost sure we provided payslips when my daughter joined (Lazy FI Mum: we did provide). I don’t think I gave it much thought. Now, when we’re signing up our son, I saw this requirement and it felt very weird.

• Some people on the FIREUK subreddit suggested I take my business (kids) elsewhere. I want to clarify that our nursery is amazing and my daughter is very happy there. As you know, my kids are my top priority. If I have to pay more, I think I will. In addition, if this is a council policy, I can’t really be mad at our local nursery, can I?

Out of curiosity, do you know of any other council where this happens?

Notes

* I know most nurseries don’t charge 52 weeks a year as they have some weeks of holiday. I’m not sure how many weeks each nursery charges so I used 52 weeks.

**I wouldn’t take the promotion in that scenario. At least not in the short term. When considering future additional promotions and the fact that nursery is only until age 3 (and a bit), we’re thinking long-term. In this case, we may accept a reduction in net pay. But that brings me back to the question- why should we?