In 2024, our most-read blog highlighted a costly tax trap many parents face when their income exceeds £100,000, causing them to lose valuable childcare benefits. We also explained how pension contributions could be used to reduce taxable income and retain these entitlements.
With recent updates already in effect and major changes coming in September 2025, we’re revisiting this important topic. In this blog, we break down the following:
- The new childcare rules
- Who qualifies for free childcare and tax-free support
- How smart financial planning, including pension contributions, can help parents keep more of their benefits
- A real-life example where a client is set to receive over 400% tax relief through effective tax planning
Who Qualifies for Childcare Support?
Before looking at the available benefits, it’s important to understand who is classed as an ‘eligible working parent’, as this determines how much support you can claim:
- Employment Status: Both parents (or the sole parent in a single-parent household) must be working, including self-employment, or on paid leave (such as maternity or sick leave).
- Earnings: Each parent must earn at least £10,000 per year (based on 16 hours per week at the National Living Wage from April 2025) but less than £100,000.
1. Free Childcare Hours
Current Entitlements
For Babies and Toddlers (Aged 9 months - 2 years)
- Since September 2024, eligible working parents can claim 15 free hours of childcare per week.
- This applies for 38 weeks per year (term time), but most nurseries allow parents to spread it over 12 months, providing around 11 hours per week year-round.
For Preschool Children (Aged 3-4 years)
- All families, regardless of income, get 15 free hours per week.
- Eligible working parents receive 30 free hours per week.
Changes Coming in September 2025
From September 2025, free childcare will expand significantly:
- Eligible working parents will get 30 free hours for ANY child between 9 months and their 5th birthday
- If you’re not working or earn more than £100,000, you’ll still ‘only’ get the standard 15 free hours for 3-4-year-olds.
In terms of how this works in practice:
- Register on www.gov.uk
- Confirm your employment status and expected income for the period ahead (above or below £100,000)
- Receive a code to give to your childcare provider
2. Tax-Free Childcare
This scheme adds a 20% government top-up to childcare costs, helping parents save more.
- For every £8 you pay into a government childcare account (managed via gov.uk), the government adds £2.
- Parents can claim up to £500 per quarter (£2,000 per year) per child.
- Funds can be used to pay for nurseries, nannies, after-school clubs, and holiday clubs.
However, not everyone qualifies - the same income and employment criteria apply as above. Parents must be working or on paid leave, and income must be between £10,000 and £100,000.
Those earning above £100,000 are not entitled to this scheme.
The £100,000 Income Threshold and its Impact
Many parents don’t realise that earning just £1 over £100,000 can trigger huge financial penalties, including:
- Losing some or all free childcare hours
- Losing all tax-free childcare
- Falling into the 60% income tax trap
To illustrate this, consider the following example:
Case Study: The Impact of Exceeding the £100,000 Income Threshold
John and Helen, both 37, have three children: a 3-year-old daughter and 1-year-old twin boys.
Current Situation:
- John earns £50,000, Helen earns £97,500.
- Their children attend nursery 4 days a week, 9 hours a day, at £7.50 per hour.
- Their annual nursery bill is therefore £42,120.
Under the current rules, they receive:
- 15 free hours per week for their twins (rising to 30 hours from September 2025).
- 30 free hours per week for their 3-year-old daughter.
- Tax-free childcare (a 20% government top-up).
Combined, for the 2025/26 tax year, these benefits are worth £25,524 a year, reducing John and Helen’s effective childcare costs to ‘just’ £16,596 per year.
What Happens When Helen Gets a Pay Rise?
Helen’s employer increases her salary from £97,500 to £115,000.
This has the following impact:
- She loses all tax-free childcare.
- She now only qualifies for 15 free hours for her 3-year-old (instead of full support for all three children).
- She falls into the 60% tax trap, where she gradually loses her £12,570 personal tax-free allowance on earnings between £100,000 and £125,140.
As a result of the above, her take-home pay increases by just £7,150 (implying a 59% marginal tax rate on the £17,500 pay rise) and her and John’s childcare costs are set to increase by £21,249.
She’s therefore now worse off to the tune of £14,099 (£7,150 - £21,249), implying a 180% marginal tax rate.
How to Avoid the £100,000 Trap: Pension Contributions
Fortunately, there’s a simple way to reverse these financial losses - pension contribution.
When the government looks at your income to decide if you can get childcare help and how much tax-free income you're allowed (your Personal Allowance), they look at something called your "adjusted net income."
This is essentially your total earnings minus any money you put into your pension via personal contribution. So if you earn £115,000 but put £15,000 into your pension, the government treats you as if you only earn £100,000 when deciding about your childcare benefits and tax allowances.
Continuing the previous example:
- Helen now contributes £15,000 (gross) to her pension.
- She actually pays in £12,000 (as her pension provider adds £3,000 in tax relief at 20%).
- She later claims back another £6,000 in tax relief via her tax return.
- As such, the final net cost to Helen of a £15,000 pension contribution is £6,000.
- Reducing her adjusted net income to £100,000, also reinstates full childcare support, saving £21,249
- Combining the above, she is £6,000 out of pocket (net cost of the pension contribution) but now has an extra £15,000 in pension savings and has effectively saved £21,249 in childcare costs.
- She's therefore effectively £30,249 'better off', equivalent to over 400% tax relief.
Conclusion
For those impacted by the £100,000 cliff-edge on childcare support, pension contributions can be a game-changer.
- If you’re slightly over the threshold, a modest pension contribution can restore childcare benefits.
- If you’re well above it, a larger one-time contribution, using available annual allowance carry forward can still provide huge tax savings.
- The bottom line is that the tax and childcare savings are too good to ignore. Planning ahead can save thousands and boost your retirement pot at the same time.
Please note this blog is for general information and does not constitute advice. The information is aimed at retail clients only. Since I don’t know your specific situation, none of this information should be construed as tax or financial advice. It is not an offer to purchase or sell any particular asset and does not contain all the information that an investor may require to make an investment decision. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is correct as of the date it is received or will continue to be correct. We cannot accept responsibility for any loss due to acts or omissions made for any articles.
