Can I afford to give up work to stay at home with the children?
The longer-term impact of taking time out of work must also be considered
Tom Evans with his three children. Photograph: Rory O’Toole Photography
When the patter of tiny feet can be heard, is it worth your financial while to keep working?
It’s a question that can strike even the most ambitious of parents; when the patter of tiny feet can be heard, is it worth your financial while to keep working?
For high earners, the sums will always go in favour of staying in their job. But for many of us, the costs associated with childcare and commuting can negate the benefits of that monthly pay cheque – at least in the short-term.
This means that many people continue to take a step down, or a step away from the workforce when they have children. Figures from the Central Statistics Office for 2013, for example, show that some 42 per cent of women aged between 34-64 don’t work, with 54 per cent not working between the ages of 55-64.
Among men, in the 34-64 age group is 78 per cent do work, a figure that is down from 84 per cent in 2006.
Indeed many couples might find that, given the staggering cost of childcare in Ireland, and the high levels of personal tax, they would be financially better off by not working.
As our example shows, someone earning €60,000 a year might only find themselves down less than €1,000 a month when the costs of childcare/benefits of tax credits are factored in.
So if you’re thinking of taking some time out from the workforce to raise your family, what do you need to bear in mind?
The childcare conundrum
Having children may be wonderful, but it’s also shocking expensive. For most parents, the challenge comes when they have a second child, with figures showing that a parent of two children living in Dublin would need to earn €30,000 a year just to pay for childcare.
After tax, this salary would leave income of €2,071 a month, just enough – or maybe not even quite – to cover the cost of childcare.
For many families, the cost of keeping kids in childcare can be greater than the amount they could earn from working while, for others, the burden can make that “going back to work” decision that bit harder.
Unsurprisingly then, the cost of childcare became an election issue, with the Labour party for example, promising a State-subsidised service which would cut costs to just €2 an hour, down from €4.90 as per CSO figures.
In the circumstances, giving up your job, and giving up those monthly childcare bills, can seem tempting.
The other way parents can boost their income if one decides to stay at home is through tax credits – although this has diminished in recent years.
The late 1990s saw a move towards “individualisation” in the tax system, which favours both spouses working, over couples where just one person works; and this is unlikely to change anytime soon, with Minister for Finance Michael Noonan asserting in 2014 that to reverse it would cost €700 million.
Nonetheless, married couples and civil partners can still benefit from a reduced tax burden when just one of them is working – just not as much as they would have done pre-individualisation.
So how does it work?
A single person pays tax at a rate of 20 per cent on all income earned up to €33,800, and 40 per cent on the balance. A married couple/civil partners with one income however, can pay the lower rate of tax on up to €42,800 of income, as €9,000 transfers automatically to the other partner. According to Tara Murray, senior manager with PwC, this works out as a benefit of €1,800 – ie €9,000 taxed at 20 per cent instead of 40 per cent.
This can help mitigate the impact of losing one salary.
The homecarer’s credit
Another credit which parents who stay at home can apply for is the homecarer’s credit of €1,000. This can be claimed in circumstances where the stay-at-home partner, who is caring for a dependent person such as a child up to the age of 18.
The credit also allows the stay at home partner to work, up to a limit of €7,200 a year (increased from €5,080 in Budget 2016).
If the stay-at-home partner’s income is in excess of the aforementioned limit, the credit may still be of use, as long as it doesn’t exceed €9,200. The difference between the actual income and €7,200 is calculated and then halved.
So, for example, someone earning €7,450 will get a tax credit of €875, while someone earning €8,950 will get a tax credit of €125.
Figures show that just 81,000 taxpayers benefited from this relief in 2015 – but it’s expected that far more people should be entitled to it, so it’s something to think about.
However, not every stay at home partner should claim it – it all depends on how much the working partner earns.
“You can’t claim the increase in standard rate band and the tax credit at the same time,” says Murray, “Each case needs to be looked at on its own merits as the decision hinges on the income of each spouse.”
In practice, Revenue will typically grant the more beneficial treatment.
“It only becomes a decision if a couple’s joint income is above €42,800 and other spouse is earning less than €7,200 per annum, and as such qualifies for the credit, or between €7,200 and €9,200 and qualifies for a reduced credit,” she says.
And remember, if you or are your partner are entitled to claim the credit but haven’t, you can claim it back for the last four years.
So how much will I lose by giving up work?
Consider the example shown in the table of two professionals living in Dublin, with one earning €80,000 and the other €60,000. With two children under the age of four, the couple are spending €2,000 a month on childcare, and a further €320 on commuting costs.
Once these costs are deducted, they have €5,345 to live on each month. If the lower-earning partner was to stop working, the couple would save considerably on childcare costs, and their income would drop by just €974 a month, or €11,688 a year, thanks to the aforementioned tax credits and reduction in childcare costs.
And, when you incorporate other costs associated with going to work, such as food, coffees and clothes etc, the gap may not be as great as one might have previously imagined.
Remember the long-term considerations
But even if giving up your job works in the short-term, don’t forget to consider the long-term implications of giving up on, or downsizing, your career.
Yes, you may only be down less than €12,000 a year if you have two small children – but over 10 years that’s €130,000, and over 20 as much as €230,000. A far from insignificant sum – and one which doesn’t take into consideration any pay rises you might have gotten over the period.
Consider our aforementioned couple. If they both held onto their jobs, after five years, with increased incomes and reduced childcare costs due to free pre-school/starting school etc, they would have almost €7,000 to spend each month.
If one of them had given up their job, they would be left with just €5,171 (even if by virtue of having more time to dedicate to their career they managed to get a higher pay rise than otherwise would have been the case). So the financial gap does increase over time.
And, while it shouldn’t be the case, it seems that time out from the workforce does make it more difficult to get back in - and makes it more difficult to get back in at similar salary level.
This means that you may also be giving up on getting a job at a similar pay scale in the future.
You will also lose out on state benefits and other benefits associated with working, such as death-in-service benefit.
If you add to your family again, you won’t be entitled to state maternity benefit of €230 a week because you haven’t been working. If you get sick, you won’t be entitled to sick pay.
“You need to have certain levels of PRSI contributions to be able to avail of those,” advises Murray.
Your pension is another consideration. It has been estimated that five years out of the workforce can es to stay at home for five years from age 35 to 40 would end up with a pension fund worth €194,316 less than if she had uninterrupted service, when she finally retires at 68.
Leaving a 20-year career in IT . . . to take care of the family
Back in 2011, Midleton-based Tom Evans took redundancy after 20 years working in the IT sector.
“I was keen to get out. I was in my early 40s and already geared up for a career direction change,” he recalls.
But the move was also about spending time with his growing family.
“I value the time with my kids. I want to be involved – as much for them as for myself. The choice was (give up work) or soldier on in a job that put the bread on the table but never ‘lit the fire’, and not really be as involved in their lives, not get to do the school runs, the collections, be there for the chaotic moments.”
His departure from his “secure pensionable” job coincided with the arrival of his family’s third child, and his redundancy package offered a financial buffer which helped mitigate the impact of dropping back to one salary.
“Yes we took a financial hit but we put quality of life and time with kids before long-term financial restraints,” he recalls.
There was also a period of adjustment to being a stay-at-home father – which was somewhat unexpected.
“The anxiety and difficult stuff hit me a few months after leaving work. I missed the routine, the lads, the craic, the variety, the social aspect, coffee breaks, lunchtime, being out and about, etc,” he says, adding that he underestimated the importance of social contact, routine and structured work spaces.
There was also the “monkey on his back” that he wasn’t earning.
“I realised how nice it is to be guaranteed a payslip at the end of the month,” he says.
Having already completed a counselling degree part-time, Evans was keen to get a business off the ground but it was proving more challenging than he had envisioned.
“This factor initially depressed me but after a while it spurred me on and then kept me focused. But I saw how this threatened my sense of self, and my self-esteem,”.
He advises others considering making a change to spend more time with their families, to think hard about it first.
“It can impact your home relationships adversely if you’re under each others’ feet a lot. It can adversely impact your self-esteem and mental health; if you really miss your workplace and lifestyle, you can end up isolated,” he advises.
Now Evans feels he has the balance right. He is working as a psychotherapist and his business, teamcare.ie, which provides critical incident stress management services to companies, is up and running.
“I still have a lot of time with the kids, and don’t have to rush out at 7 or 8 in the morning,” he says, adding the couple are able to split pick ups and drop-offs between them.
“We’re quite lucky.”