Childcare Costs and the £100k Cliff Edge: How Pension Planning Can Save Thousands
Discover how the latest childcare support can save your family thousands, and how smart pension planning can ensure you don't miss out.
It's easy to get caught up in the media doom-mongering around the upcoming Autumn Statement. With disappointing growth figures and ballooning public debt payments, it's unlikely to be good news for UK taxpayers when Chancellor Rachel Reeves takes the stand on 26th November.
But amid the gloom, there was at least one bright spot for families this month. September 2025 marks the next phase of the government's expansion of free childcare hours – and it's a significant one.
What’s changed?
Since September 2024, eligible working parents of children aged 9 months to 4 years have been entitled to 15 free childcare hours per week for 38 weeks of the year. This sits alongside the extra 15 universal hours available to all parents of 3-4 year-olds.
To recap, an 'eligible working parent' is someone who earns more than the National Minimum Wage equivalent (around £9,518 per year) but less than £100,000. And that £100,000 threshold is a cliff-edge hard stop – earn a penny more and you're entitled to zero free hours for children from 9 months to their third birthday. Harsh (although this can be countered via pension contribution - more on this later).
From September 2025, the support has doubled for the youngest children. Eligible working parents of children aged from 9 months to 2 years will now be entitled to 30 free childcare hours per week (for 38 weeks of the year). In other words, an extra 15 hours compared to the previous rules.
There's no change for 3-4 year-olds – eligible parents continue to get 30 free hours, whilst ‘ineligible’ ones receive the universal 15 hours.
The table below summarises free childcare entitlement by age:
The increase represents a substantial saving for families. With average nursery costs of £6-10 per hour in many parts of England, the additional 15 hours could save eligible families between £3,400-5,700 per year – a welcome relief in these challenging economic times.
Mind the £100,000 cliff edge
The new rules bring the £100,000 earnings cliff edge into even sharper focus.
A pay rise above this threshold could cost a parent 15-30 free hours of childcare per week. It also results in the loss of entitlement to Tax-Free Childcare, whereby you can pay into a government childcare account and any contributions will be topped up by 25%, up to a maximum of £500 per quarter (£2,000 per year).
However – and regular readers will be familiar with this strategy by now – a well-timed pension contribution, either personally or via salary sacrifice, can be used to reduce your adjusted income below £100,000, on which the childcare entitlement is based.
A pension is a long-term investment and funds are not normally accessible until 55 (rising to 57 from April 2028). When investing via a pension, your capital is at risk. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
I wrote recently about my frustrations that the media focuses so much on the unfairness of the £100,000 childcare cliff edge, yet offers no coverage of the relatively straightforward way in which this can be countered. Bad news sells, I guess.
With the new rules coming into play:
the maths are even more supportive of this strategy, and
it's also relevant for those earning well above £100,000, potentially 'storing up' a substantial pension contribution over a few years.
Here's a real-world case study of how we’re planning for a £100,000 pension contribution at a net cost of just £24,450.
Case Study: The Pension ‘Whopper’
My client – let's call her Kate – has an 18-month-old and a newborn baby.
She plans to return to work in April next year, conveniently coinciding with the new tax year. She anticipates earning £200,000 in the next (i.e. 2026/27) tax year.
Her husband also works and earns around £75,000 (between the £10,000 and £100,000 thresholds for 'eligible working parents' – note that both parents must qualify to receive the extra childcare support).
They intend to put both children into nursery for four days a week, 10 hours per day. They live in London where nursery costs are generally higher – in their case, £10 per hour.
That implies a total nursery bill of £800 per week (for the two children), or £41,600 per year.
Without any planning, Kate and her husband would not be entitled to any childcare support and would have to foot this bill entirely from their take-home income.
However, this is the strategy we've put in place:
Kate defers major pension contributions for the current tax year, ensuring enough carry-forward allowance for next year. She also has some annual allowance carry-forward available from 2023/24 and 2024/25.
For the interim, she prioritises setting aside any income surplus to build a substantial savings pot ahead of...
The 'Whopper' Contribution: At the end of the 2026/27 tax year, she makes a £100,000 gross pension contribution. This is the tax year when the marginal benefit of bringing her adjusted income below £100,000 will be greatest, hence the 'pension whopper' in that year.
Of this, the first c. £75,000 qualifies for 45% income tax relief. The upper c. £25,000 qualifies for an effective 60% tax relief (as her tax-free Personal Allowance will be restored by bringing her adjusted income down to £100,000).
Therefore, on tax relief alone, the net cost of a £100,000 pension contribution is £51,250.
In terms of mechanics, she will actually pay £80,000 net into the pension. Basic rate (20%) tax relief is applied automatically, and she'll later receive £28,750 back via a tax rebate on completion of her tax return. It's therefore generally good tax planning to make the contribution late in the tax year, then file your tax return at the start of the new one to limit that cashflow drag.
Reduction in Childcare Costs: By reducing her adjusted income below £100,000, Kate also reinstates:
30 free hours of childcare per child per week (for 38 weeks), a saving of £22,800 per year (2 children × 30 hours × £10 per hour × 38 weeks)
Tax-Free Childcare eligibility, worth up to £4,000 per year via the government top-ups. This can also be used to pay for other clubs and activities. On their planned nursery attendance, Kate and her husband would likely make full use of this allowance, implying a further cost saving of £4,000
Combining the two, their childcare costs will be reduced by £26,800.
The Bottom Line
If we now combine the net cost of the pension contribution with the reduction in childcare costs, this reduces the effective net cost of £100,000 in pension savings to 'just' £24,450.
In other words, Kate and her husband will be worse off to the tune of about £24,500, but Kate will have an extra £100,000 in her pension. That is as good as it gets from a tax planning perspective, implying an effective 300% return on tax relief and cost savings alone.
In terms of a boost to retirement savings, let's assume that £100,000 of additional pension savings compounds at a conservative 3% per year net of inflation and costs over 30 years to Kate's assumed retirement. That will grow to a pot worth around £240,000 in today's price terms.
And applying a simple 4% safe withdrawal rate as a 'rule of thumb', that would provide an annual inflation-linked income of about £10,000 per year in retirement.
Timing is critical
One final word of caution: childcare eligibility must be applied for in advance, whereas tax relief is applied retrospectively.
In the example above, Kate would need to self-certify that she will earn less than £100,000 in the 2026/27 tax year ahead of April 2026, even though she will essentially go through that earnings threshold during the course of the year, then back down below it right at the end of the year via a pension contribution.
This is a crucial point that is often missed, with many believing they'll get a rebate for the childcare hours too. That's not how it works – you'll get the cost savings first, then the tax relief later.
Happy Thursday!
Kind regards,
George
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