The Childcare Cut-Off: Why Earning Over £100k Can Leave Parents Worse Off

Author – Clio Livingston, Financial Adviser at Twelve Wealth Management

Has UK childcare funding become counterintuitive? For families where one parent earns just over £100,000, the system can mean losing thousands of pounds in support—overnight.

In September 2025, the government expanded free childcare in England, granting children under three the right to 30 hours of funded care per week, alongside the existing tax-free childcare scheme. For many, this is a welcome change. But for households where just one parent earns over £100,000, the full childcare entitlement disappears entirely. Unlike some benefits, it doesn’t taper off gradually—it simply vanishes.

A Threshold That Feels Unfair

The problem isn’t the idea of limiting support above a certain income. It’s the way the rules are structured. A single parent earning £101,000 loses all childcare support, while a couple each earning £99,000—combined £198,000—can still claim the full entitlement.

Small changes can have big consequences. Consider a household earning £99,990. Life is tight, but manageable. Then one parent discovers an old savings account that earned £11 in interest. That minor addition pushes household income over £100,000, suddenly costing the family up to £2,000 per child in childcare support.

In London, the impact is even more stark. According to the Institute for Fiscal Studies¹, a family with two children in nursery would need a combined income of over £149,000—almost a 50% pay rise—to match the disposable income of a household earning £99,999. With childcare costs in the capital already high, crossing the threshold can wipe out any perceived benefit of a pay rise.

The 60% Tax Rate

Childcare isn’t the only issue. Crossing £100,000 also triggers the withdrawal of your personal allowance (£12,570 of tax-free income), creating an effective marginal tax rate of 60% up to £125,140. Above that, the rate drops to 45%. This rule has been in place since 2010 and hasn’t been adjusted for inflation. If it had, the threshold would now sit closer to £150,000.

For many families, the first they hear of this is when an unexpected tax bill arrives—PAYE cannot account for it automatically.

Strategies to Stay Ahead

There are ways to manage adjusted net income, though none are perfect:

• Pension contributions: Reducing taxable income via pension contributions is tax-efficient, though the money is locked away until retirement.
• Salary sacrifice: Exchanging salary for benefits like additional pension contributions, electric vehicles, or extra leave can keep income below the threshold.
• Gift Aid donations: Charitable giving reduces adjusted net income while providing tax relief, though careful tracking is required.

Ultimately, these strategies can leave families with less take-home pay each month, even if they save more overall. With high mortgage interest rates, rising bills, and increasing childcare costs, this reduction in cash flow can feel challenging. It becomes a balancing act: keeping the childcare benefit and reducing your tax bill, while managing a tighter monthly budget. On the bright side, one upside is that your pension will be growing steadily, giving long-term financial peace of mind.

Planning Ahead

Crossing £100,000 is meant to feel like a milestone, but for families where one parent exceeds it, the reality can be financial pressure rather than freedom. Small adjustments—through pensions, salary sacrifice, or charitable giving—can make a meaningful difference. And seeking advice from a financial professional can help balance short-term needs with long-term planning.

Until policy changes, families earning just over six figures will continue to face the paradox that earning more doesn’t always translate to having more. Awareness and proactive planning are essential.

If you want help understanding financial planning strategies to support your family, please get in touch via clio.livingston@sjpp.co.uk or 07404 287911.

¹What is the effect of the two-child limit on children’s school readiness? - Sarah Cattan, Tom Waters and Tom Wernham, Institute for Fiscal Studies, September 2025

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