Reference no: EM133143986

Question - Jay and Kay are a couple with two young children, Mae, aged 9 months and Faye, aged 2. Kay has been on maternity leave and is due to go back to work full time in the local library. Jay is employed full time in a clay workshop. Both parents are in their mid-thirties and live in Grays, Essex. They are looking into arranging childcare once Kay starts work again.

Both children could attend a local nursery full time nearby from Monday to Friday, at a cost of £528 per week for both. Kay also receives child benefit, equating to £1,827.80 per year.

1 Jay has the option to work flexibly by halving his hours from 40 to 20 for the next three years. Under this arrangement his monthly gross pay will also halve to £772.

Jay says that if he takes this option, his financial sacrifice might be more than just the £772 per month in lost income over this three-year period. Identify two factors that might cause Jay to have a much larger financial loss over his lifetime if he takes this option of going part-time.

2. Kay earns a gross annual income of £20,400 per year, working 40 hours per week. Her employer introduces changes to working practices that will also allow her to reduce her hours and her pay by up to 50%. The household is discussing the short-term opportunity costs of Kay taking the part-time (50%) working option, rather than Jay.

With respect to gross earnings only, briefly explain the short-term opportunity cost of Kay going part-time as opposed to Jay.

3. If Jay decides to take the part-time option, this would reduce his net annual income to £9,264. Kay would continue to receive her full-time earnings, which equate to £17,534.16 per year after tax and National Insurance contributions. Mae and Faye would then only attend nursery on a part-time basis at a cost of £264 per week for both of them.

4. Using the Tax credit calculator where appropriate, calculate the couple's total tax credit entitlement and their net household income after childcare costs.

5. The household is also considering a second option, whether Jay should stay in full-time employment, with the children going to nursery full time. Jay's income net of tax and National Insurance would then be £16,261.20.

Using the Tax credit calculator where appropriate, work out their tax credit entitlements and net household income after childcare under this option, and compare the short-term financial situation of the household with the previous option.