The £100K childcare trap: Why some parents are losing thousands, and how to avoid it

This is an issue that is set to get worse. According to HMRC figures obtained by Rathbones, around 1.8 million people earned over £100,000 in 2024/25. That number is projected to reach 2.29 million within four years, an increase of nearly half a million people, many of whom are parents who depend on government childcare support.

Here, we explain how the £100k childcare trap could catch you out, why it matters, and what practical steps you can take to protect yourself.

The £100k childcare trap explained

The two main childcare support schemes, which are tax-free childcare worth up to £2,000 per child per year and 30 hours of free nursery care, are only available if each working parent earns below £100,000.

Household income isn’t considered. That means a family with two parents earning £99,000 each (£198,000 combined) keeps full support, while a single-earner family earning £100,001 loses everything,

This creates a situation where even a modest pay rise can leave parents materially worse off overall.

The £100,000 tax trap is one of the most baffling quirks in our tax system.
Stephanie Ebner, a Financial Planning Lead at Rathbones

Stephanie Ebner, a Financial Planning Lead at Rathbones, says: “The £100,000 tax trap is one of the most baffling quirks in our tax system. Originally designed to target the very highest earners, after 15 years of inflation and frozen thresholds, it now ensnares thousands of professionals who were never meant to be caught. It has increasingly become a stealth tax on the middle class.”

“For parents with two children under five, earning just £1 over £100,000 can mean losing childcare support worth almost £20,000. These costs must be covered from post-tax income, so it’s no surprise many are concerned. Hard-working families would need a substantial pay rise just to offset the impact of this tax trap.”

How earning more can leave you worse off

The £100,000 trap also triggers a hidden 60% effective tax rate because the personal allowance is withdrawn once income exceeds this threshold.

Take someone whose salary increases from £99,000 to £102,000. They not only pay 40% tax on the extra £3,000, which is £1,200, but they also lose £1,000 of their personal allowance. That lost allowance is effectively taxed at 40% as well, adding another £400 in tax. Altogether, the individual pays £1,600 on that £3,000 pay rise, which equates to an effective 60% tax rate.

Once the loss of £2,000 tax-free childcare is factored in, they are £600 worse off despite the pay rise.

Why it’s not just salary that matters

One of the hardest parts of the £100,000 trap to get to grips with is that eligibility for childcare costs isn’t simply based on your headline salary, but rather on what’s known as your ‘adjusted net income’.

This is your total taxable income (including your salary, bonuses, overtime and any other income such as rental income) minus allowable deductions such as pension contributions and Gift Aid.

Adjusted net income also includes the personal allowance, currently £12,570, which in the recent Budget was frozen until 2030/31.

Legitimate ways to stay below the threshold

As certain payments can reduce your adjusted net income, you might be able to use these to bring you back below to the £100k threshold so that you don’t lose your childcare support.

Options include:

Pension contributions: Adding to your pension is one of the simplest ways to keep your adjusted net income below £100k. For example, if you are earning £99k and you receive a £2,000 pay rise but pay the £2,000 into your pension, your pension contribution will not only benefit from higher rate tax relief of 40%, but your annual income will also fall back below the £100k threshold, so you avoid the 60% tax rate and also keep your tax-free childcare.
Salary sacrifice schemes: the salary sacrifice scheme replaces your cash salary with non-taxable – or tax relieved – income to pay for things like childcare vouchers (though mostly closed to new joiners), the Cycle to Work scheme. For example, if you sacrificed £1,500 of your salary for a bicycle through your employer’s salary sacrifice scheme and your salary is £101,000, this would take you below the £100k threshold, ensuring you remain eligible for childcare support.
Gift Aid charitable donations: If you make a Gift Aid donation, you can take off the ‘grossed-up’ amount from your net income. This is what you paid plus the basic rate of tax. So, for every £1 of Gift Aid donations you made, take £1.25 from your net income.
Spreading bonuses across tax years: If your employer pays you a big bonus one year, it’s worth seeing if you might be able to spread it across two tax years so that your adjusted net income doesn’t exceed the £100k threshold. Alternatively, you could ask your employer to redirect some of your bonus straight into your pension.
Interspousal transfers: One potential way to avoid crossing the £100k line, may be to think about whether you can transfer any income-generating assets to your spouse if their income is lower than yours. Jason Hollands of wealth manager Evelyn Partners said: “If you derive income from other sources such as a second property, alongside wages and bonuses, another option to consider if you are married, is to transfer the assets to your spouse if they are subject to a lower tax band.

“This is known as an “interspousal transfer” and will not trigger a tax charge providing you are married or in a civil partnership. However, such a move would mean fully legal entitlement is passed to your spouse, so trust is vital.”

The £100k tax trap: your action checklist

Calculate your adjusted net income: Use gov.uk's guide to help you work out your adjusted net income and the circumstances when it can affect your tax liability.
Check your childcare entitlement status: Log into your Childcare Account to confirm your renewal dates and check what earnings HMRC has on record
Ask your employer about benefits or salary packaging: Find out if your employer offers salary sacrifice, whether part of a bonus can be paid into your pension, or whether it’s possible to spread a bonus across tax years.
If unsure, get independent advice: A consultation with a qualified independent financial adviser or accountant could potentially save you thousands in lost childcare.
Contact HMRC: If you think you’re about to cross the £100,000k threshold, it’s worth calling HMRC for clarity. Errors in adjusted net income calculations can have big consequences, so it’s important to check your sums are right.

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Meet Melanie Wright, our finance expert Melanie Wright is an award-winning freelance financial journalist, and a former Deputy Editor of The Daily Telegraph’s Your Money section. As well as writing weekly for Radio Times money, she contributes regularly to The Sunday Times, The Daily Telegraph and The Observer, and wrote the Sunday Mirror’s Money pages for more than a decade. She also writes for a number of magazines and websites, including MoneySuperMarket.com and MSN Money, and has appeared on both television and radio discussing money matters.
 