The £100,000 childcare trap

What you lose over £100,000

• Tax-Free Childcare: the government adds £2 for every £8 you pay your provider, up to £2,000 a year for each child, until the 1 September after their 11th birthday.
• Funded hours in England: working parents get 30 hours a week, 38 weeks a year, from when a child is 9 months old until they start school. Every 3 and 4 year old gets 15 of those hours whatever their parents earn, so a family over the limit keeps 15 and loses 15 for a 3 year old, and loses all 30 for a younger child.
• Your Personal Allowance: between £100,000 and £125,140 it's reduced by £1 for every £2 of income, so each extra £1 is taxed at 60%. That's the 60% tax trap.

The test is on each parent separately. Incomes aren't added together, so a couple on £100,000 each keeps everything, while a couple on £101,000 and £20,000 loses it. Each parent must also earn at least £2,643.68 over 3 months, about 16 hours a week at the National Living Wage.

What counts as income

The test uses adjusted net income: your total taxable income, including bonuses, rental profits, savings interest and dividends, less pension contributions and Gift Aid donations. Pension contributions come off however they're made:

• through salary sacrifice or a net pay scheme, they come off your pay before tax
• into a relief at source scheme or a personal pension, the contribution grossed up by the basic-rate relief comes off: paying in £800 takes £1,000 off

When you apply, and each time you reconfirm every 3 months, you say whether you expect your income for the tax year to be £100,000 or less. A bonus late in the year can tip you over, so it helps to plan before the year ends.

Worked example

Priya earns £110,000 and pays 5% into her pension by salary sacrifice. Tom earns £45,000. They live in England, have a 2 year old and a 3 year old, and their nursery charges £2,200 a month (£26,400 a year) before any help.

Priya's adjusted net income is £104,500, so they get no Tax-Free Childcare and none of the working-parent hours. At the nursery's £6.60 an hour, that costs them:

If Priya sacrifices another £4,500 of salary into her pension, her income for the test comes down to £100,000. Her take-home pay falls by only £1,710, because the £4,500 would have been taxed at 60% and her National Insurance falls too, and the family gets the £13,556 back. They're £11,846 a year better off, with £4,500 more in Priya's pension.

See what the £100,000 limit costs your family →

The cliff edge

Here's what Priya and Tom have left each year after tax and childcare at different salaries for Priya, with Tom's pay and their nursery bill as above:

A £1,000 pay rise from £105,000 to £106,000 leaves the family £13,145 worse off. Without a pension top-up, Priya would need to earn about £140,000 before the family has more to spend than at £105,000. With the top-up, the money left stays level from £106,000 and everything above it goes into her pension.

Wales, Scotland and Northern Ireland

Tax-Free Childcare is the same across the UK, but funded hours aren't. For Priya and Tom's family:

• Wales gives up to 20 hours of childcare a week for 3 and 4 year olds on top of their nursery education, but tests it on gross income: pay before pension contributions. A pension wins back Tax-Free Childcare, not the hours.
• Scotland gives every 3 and 4 year old 1,140 hours a year with no income test, so only Tax-Free Childcare is at stake.
• Northern Ireland has no income-tested hours, but its Childcare Subsidy Scheme takes 15% off the bill for parents getting Tax-Free Childcare, so it goes over £100,000 too.

Before you change your pension

Salary sacrifice also saves National Insurance, so it usually costs least, but it lowers your pay for things like mortgage applications and some life cover. From April 2029, the National Insurance saving is capped at £2,000 of sacrifice a year.

The annual allowance. Pension contributions above £60,000 a year (less for some very high earners) face a tax charge, unless you have allowance left from the last three years.

Child Benefit. Between £60,000 and £80,000 the High Income Child Benefit Charge takes it back. The same pension contribution lowers that too.