What caught my eye this week.

Remember last summer when I pondered whether an army of everyday investors – led by a legion of cash-rich city boys – had gobbled up so much of the low-coupon Treasury 2061 gilt that it was distorting the yield curve?

Readers steeped in the UK government bond market opined in the comments. I’d say the conclusion was “hmm, maybe a little bit.”

Well this week The Bank of England published data showing that at the other end of the spectrum – the ultra-short end, where gilt issues will mature in a year or two – retail investors are definitely driving the bus. At least when it comes to the low-coupon issues.

Gilt-edged investing

Reminder: capital gains on gilts are free of capital gains tax. You only pay tax on the income component of your total return.

As The Accumulator explained to members, this means that holding short duration low-coupon gilts can deliver higher after-tax returns than cash for investors with a lots of spare change outside of tax shelters.

A graphic from the Bank of England illustrates the difference:

Source: Bank Underground

For an investor who has filled up their ISAs (and perhaps maxed out on premium bonds) this tax treatment makes short duration low-coupon gilts much more attractive than cash savings, where only a small tax-free savings allowance shields your interest income from HMRC. Especially at the higher income tax rates.

It’s not surprising then that the Bank of England’s data shows ‘retail’ investors (individuals like you and me) own huge swathes of ultra-short low-coupon gilts:

Source: Bank Underground

Roughly 80% of the free float ¹ of that low-coupon Treasury 2026 gilt is held by retail investors.

Compare that to the intermediate and long duration gilts. Here retail participation is far lower.

By comparison the shortest end of the gilt market is now an ordinary investors’ playground.

Millions of people or millions of pounds…

Of course ‘ordinary’ doesn’t necessarily mean your mum owns some.

There could be a relatively small number of cashed-up oligarchs whose wealth advisers moved their millions into ultra-short duration gilts, as opposed to it being the latest hot thing for Joe Public.

I first wrote about the tax advantages of low-coupon gilts back in January 2024. I wouldn’t say the response was rabid.

My co-blogger’s typically in-depth explanation did garner a bit more interest. But I suspect that after 2022, some readers just hear the word ‘bond’ and shudder.

Well if you have a lot of unsheltered cash sitting around getting taxed then consider this your wake-up call.

Finally, the Bank’s holding data does shed more light on Treasury 2061, revealing that retail investor involvement here is actually very small.

That doesn’t mean the particular attractions of Treasury 2061 aren’t distorting the yield curve. But it does suggest that it’s institutions (hedge funds and the like) who are driving that train.

Have a great weekend!

[continue reading…]

1. i.e. After backing out what the Bank owns due to quantitative easing.[↩]

Childcare can be terrifyingly expensive prospect for parents and would-be parents. And a complex one too, with UK parents of under-fives facing a hodgepodge of overlapping schemes, rules, and exclusions.

Navigate this support system correctly, and even highly-paid mums and dads can save tens of thousands of pounds a year.

But play it badly – as many parents do – and you could end up working some of the lowest-paid hours of your life.

In fact even if you’re a parent who’s happy with your current arrangements, I’d urge you to run the numbers to make sure you’re getting the most for your money.

Let’s survey the territory.

Why parents need government support

First off, you might be wondering why any taxpayers’ money is going towards childcare in the first place?

Well I’d argue there are plenty of reasons for the state to provide some support. Not just for the sake of the parents, but to help society as a whole get the most from all its citizens.

At the sharp end, nurseries can easily cost £100 a day in London and the South East. Prices do vary around the country, but the minimum wage and legally defined staffing ratios means there’s little wiggle room to undercut competitors.

A 20-something earning the average salary of £34,724 takes home about £110 per day after tax. That’s only £10 more than that daily nursery fee.

Ouch!

And once you factor in commuting costs and time off when the child inevitably gets sick (and if you thought the nursery would waive the fee after sending them home, think again), a parent is in the red.

Now call me a hopeless romantic, but I’d like to think our economy is better served by encouraging young professionals to stay in work. This way parents continue developing skills, contribute to productive economic growth, and eventually become higher-rate taxpayers – rather than dropping out for several years just to look after children.

There’s also a straightforward numbers argument.

If a child is aged three or over, nurseries can operate at a ratio of one adult to eight children. That means eight parents can potentially remain in work, earning and paying tax. Not to mention the nursery worker who has a job and an income, and so makes a tax contribution of their own.

Compared to all those parents quitting work to provide childcare themselves, that’s nine taxpayers instead of zero!

And yet plenty of people – perhaps some to come in the comments to this article – argue that funding pre-school childcare is a costly extravagance.

There’s a demographic problem, too

As we’ve seen, given typical nursery costs and salaries it simply doesn’t pay for the average person to work and also send their child to nursery without government support.

And if a parent does give up work to look after a nursery-age child, then good luck them saving a deposit for a suitable family home near a decent school.

Without any government intervention, only a handful of groups could realistically afford to have children:

• The very wealthy
• Those fortunate enough to have healthy parents or in-laws who can all bear to live with each other
• People relying on benefits

Isn’t it curious that many of the same people who argue the state shouldn’t fund childcare are also unhappy about funding non-working families on benefits?

What’s more, if average young professionals are effectively shut out from having children then we face a looming income-tax gap. A missing cohort will never grow up to earn and pay taxes (and to fund pensions…)

I suppose we could fill the gap with mass immigration? That shouldn’t cause any controversy.

Know your limits

Do I think everyone should have unlimited access to free childcare?

No. But I do believe it’s worth recognising there are good reasons for providing some state support.

Unfortunately, given the political awkwardness of spending money at a time when we’re supposedly slashing everything except tax rates, perhaps it’s no surprise that the system we’ve ended up with is convoluted and unwieldy.

So what support can a working parent get?

First: Child Benefit

You receive £26.05 per week for the first child and £17.25 for subsequent children – £1,355 and £897 per year respectively.

However, this is clawed back for people with an adjusted net income over £60,000, at a rate of 1% for every £200 of income (since 2024). By £80,000, the entire amount has to be repaid.

On the plus side, if you do earn over the £60,000 threshold then you can treat it as an interest-free loan and repay it via self-assessment. (Possibly the most time-consuming form of stoozing yet devised!)

You receive this benefit whether or not you use nursery care, so I won’t dwell on it — but it’s worth being aware of.

Second: Tax-free childcare

As you’ll see, we do love giving these things stupid names.

Tax-Free Childcare lets you pay money into a ring-fenced account, with the government topping it up by up to £500 per quarter. Pay in £8,000 a year, and it becomes £10,000.

So it’s ‘tax-free’ in the sense that many people pay 20% income tax (we’ll ignore National Insurance and Scotland here) and the top-up is also 20%.

But if you ask me, that’s not exactly intuitive.

Also, that pesky adjusted net income business makes another appearance, too. If either parent earns over £100,000 then the family isn’t eligible.

And now for the big hitter…

Third: Free childcare for working parents

Bear with me, because in my opinion this is an absolute mess. I’ll even skip some darker corners and edge cases for the sake of brevity (and your sanity).

So… if your child is aged between nine months and four years – and if you meet a long list of conditions – then you’re entitled to 30 hours of free childcare per child, per week.

Sounds simple?

Gotcha!

Of course it isn’t.

Those 30 hours only apply during the 39 weeks of term time. If your family doesn’t conveniently cease to exist during school holidays, then many providers will ‘smooth’ these hours into 22.8 hours across 50 weeks.

Which leaves the remaining hours charged at full price.

Also, you might think nurseries would allow parents to take a couple of weeks’ holiday each year. But actually they’ve typically decided it’s much easier to just charge everyone all year round.

Still at least you get 22.8 hours free each week… right?

Well… not quite.

Providers are allowed to charge extra for food, nappies, and similar essentials. Which means in practice you’ll find yourself paying a seemingly arbitrary additional amount for those ‘free’ hours.

In my case, it works out at about £1 an hour. But it seems to vary according to the luck of the draw.

Starting to see why I question whether this really counts as ’30 hours per week of free childcare’?

Oh, and of course if one of your adjusted net incomes is over £100,000 then you’re not eligible anyway.

Funding childcare: in practice

Let’s consider Hannah, who has two children under five years old.

Hannah has found the cheapest (acceptable) local nursery charges £100 per day. That’s on the basis of a 10-hour day, 8am-6pm.

This enables Hannah to work her 9-5 job and make it back for pickup.

On paper then, Hannah is set to pay £1,000 per week to send her two kids to the nursery at full whack.

That’s £52,000 per year – well above the average gross salary of people in their 40s, let alone 20s.

(Perhaps better to delay getting frisky until the arthritis is setting in?)

Thankfully, state support can make a big dent in Hannah’s looming cash crunch.

Supposing Hannah and her husband Ben each earn £40,000 per year. That’s an above-average income, but it’s not so high that they can’t take full advantage of the three support mechanisms I outlined above: child benefit, tax-free childcare, and free childcare for working parents.  

I’ll ignore child benefit, since this is accessible whether they use nurseries or not and doesn’t change the maths. We’ll just look at the 22-odd hours a week of pseudo-free childcare and that ‘tax-free childcare’ account.

After the free childcare they’re paying per child:

• £10 for nappies and food on Monday
• £10 for nappies and food on Tuesday
• £80 for 2.8 free hours and 7.2 chargeable hours on Wednesday
• £100 for a chargeable day on Thursday
• £100 for a chargeable day on Friday

That’s £300 per week, or £15,000 for 50 weeks. Plus £1,000 for the unfunded two weeks. So £16,000 per year all-in.

They can also claim £2,000 per child in top-ups via Tax-Free Childcare.

That cuts the total bill to £14,000 per child – or £28,000 for the pair.

How much is Hannah actually earning?

Maths-savvy Monevator readers will notice that £28,000 is substantially less than the £52,000 bill Hannah and Ben faced without government support.

It might therefore seem churlish to protest further.

However this is still a lot of money going out – and a lot of running about from work to nursery to home and to bed.

So how does it compare to the alternative of one parent quitting work for a bit?

Let’s assume – with due deference to the potential for stereotyping – that of this particular couple, Hannah is the one who is more inclined to look after their children in place of work.

Of her £40,000 in annual pay, Hannah takes home a net £32,320.

Going down the childcare route, the £28,000 nursery bill we just calculated leaves her with £4,320 leftover from her £32,320.

Which means that across 260 working days, Hannah is effectively clearing just £17 each day.

Let’s hope she doesn’t have to spend that on a train ticket to get to her office.

Sick notes

Hannah’s effective earnings will only shrink further if she has to spend a week unpaid at home when one of the kids has a temperature.

Which will happen sooner or later. If you’ve ever experienced the joys of kids attending nurseries, you’ll know they will get coughs, colds, and temperatures. Constantly!

(Mind you those are a breeze compared to the norovirus.)

In any event, the nursery, of course, continues to charge whether the kid is there or not.

True, with no government support at all, even just one child in nursery will cost more than the average salary brings in. A parent would be more or less compelled to quit their job.

But in Hannah and Ben’s case – with two children and government support – there’s a choice to be had.

The benefits of working are still pretty marginal for Hannah though. At least in pure cash terms.

The fun of marginal tax

Here’s another scenario to ponder.

Let’s assume that Hannah’s employer is happy for her to work part-time.

On a pro-rate basis with respect to her £40,000 annual income, Hannah effectively earns £8,000 for each day of the week that she works. (That’s £40,000 / five days of course.)

But since the first £12,570 of that isn’t taxed at all thanks to the personal allowance – and National Insurance is in the mix too – reducing your income can have a big impact on your actual take home pay.

If Hannah drops her income by 20% – going from £40,000 to £32,000 per year – then her take home pay reduces from £32,320 to £26,560.

That’s a smaller fall of 17.8%. Not quite as bad as you might have expected?

If Hannah now sends the children to nursery only four days each week, the cost falls to £10,800 per child per year. With the benefit of ‘tax-free childcare’, that drops to £8,800 – or £17,600 for both of them.

We calculated earlier that, working five days per week, Hannah had an annual income surplus after nursery costs of £4,320.

Now – having reduced her net earnings to £26,560, and by looking after the kids for one day a week and subtracting £17,600 in nursery costs – Hannah is effectively bringing home £8,960 from staying in work.

That’s right! By dropping from five days a week in the office to four, Hannah ends up getting almost £5,000 extra cash into her purse over a year.

What’s more, cutting her days back to three leaves Hannah even further up on the deal:

Scenario	Gross Income	Net Income	Nursery annual cost	After Tax Free Child-care	Net benefit of working
Full-time work	£40,000	£32,320	£32,000	£28,000	£4,320
Four days work a week, one day childcare	£32,000	£26,560	£21,600	£17,600	£8,960
Three days work a week, two days childcare	£24,000	£20,800	£11,200	£8,960	£11,840

This is partly because the 30 hours support stops above 22.8 hours per week, which equates to two-and-a-bit days. Hence working for those fourth and fifth days are disproportionately expensive.  

Factor in the effective cap of ‘Tax-Free Childcare’ – which doesn’t help you further once costs go above £10,000 per year – and the fact that marginal tax rates mean your fourth and fifth days each week are effectively your least lucrative, and for Hannah more work really does not pay.

Paid more than £100,000?

The situation is even more diabolical.

With an adjusted income exceeding £100,000, Tax-Free Childcare isn’t available.  

You mostly aren’t eligible for any free childcare either (though you may get ’15 hours per week’ for children over three).

In the worst-case scenario, with children under-three, that means you’re losing out on 22.8 hours worth £10 each across 50 weeks – that is, £11,400 plus the £2,000 of tax free childcare.  

Which works out as £13,400 per child.

Also bear in mind that someone earning £100,000–£125,140 is paying a marginal tax rate of 60%.

What if you were earning £99,000 (£67,981 net), and your employer announced that you were receiving a £25,000 bonus. How much of that would you expect to keep?

Well that bonus is going to get taxed heavily due to that notorious 60% marginal tax rate. Hence you will take home £77,681 net.

But hey, that’s still £9,700 more than you had before, right?

Ahem… not so fast. Remember you have also lost £13,400 per child in government support.

Ah…

In the worst case, with two children under three, you actually end up £17,100 worse off than if you had never got that £25,000 bonus in the first place!

Of course you could decide to shovel your bonus into a pension, keep your adjusted net income under £100,000, and prepare for a life of champagne cruises once the kids have left home.

Also I’m not sure that I think people earning six-figure incomes should get more support with childcare, given all the other pressures on the state coffers, even after acknowledging this horrible maths.

But it is a good demonstration of how poorly thought through these various schemes are.

It’s entirely possible that it might be more profitable for talented high-earners in the prime of their careers to actually work less. Which is not exactly a recipe for improving Britain’s productivity crisis.

P.S. Your mileage may vary

Of course real-life is never quite as simple as raw numbers chosen to make a point in an article.  

For example, your employer might not even entertain the thought of enabling you to cut a day or two at the office, just to help with your ulterior motive of saving money on little Boris’ nursery fees.

Also consider that by quitting work for a bit – or even just by reducing your hours – you could miss:

• Promotion opportunities given only to full-time employees
• Career prospect-boosting special assignments
• Higher bonuses
• Matched pension contributions
• The cream of the office gossip

I can’t quantify what those are worth for you. But I can tell you my wife and I have faced this childcare challenge ourselves.

Neither of us wanted to give up our careers or to be full-time stay-at-home parents.

But I admit there was a moment when we sat down and looked at the numbers – and it seemed to be madness for one of us to schlep to work every morning just to earn the train fare and a sandwich.

Especially when a motivation for having kids was all the fun you can have by spending time with them.

If you’re a parent with young children, run your own numbers. You might be surprised how little you’re really exchanging your time for!