A parent in the UK earning just over £100,000 could be hit with an unexpected financial blow of more than £27,000, despite only receiving a small pay raise. This figure reflects the combined impact of reduced personal allowances, lost childcare benefits, and additional tax liabilities. The situation arises from overlapping income thresholds and the way HMRC calculates adjusted net income.
Birmingham Mail recently reported that the issue is particularly relevant following the September rollout of expanded childcare support in England. As HMRC applies strict eligibility criteria, families near the threshold may face unintended losses across multiple support schemes.
A £2,000 Raise Could Cost Parents Over £27,000
Under current tax rules, a parent earning £99,000 who receives a £2,000 salary increase may cross the £100,000 adjusted net income threshold, triggering a cascade of losses. These include:
- The gradual removal of the £12,570 personal allowance, costing up to £5,028 in extra tax
- The loss of eligibility for tax-free childcare, worth up to £2,000 per child annually (or £4,000 for two children)
- A cut to enhanced free childcare hours, estimated to be worth £6,000 to £7,000 per child
- The loss of child benefit, which could amount to roughly £2,074 annually for two children once HICBC applies
When these factors are combined, families may find themselves over £27,000 worse off overall, despite having only marginally increased their gross income.
How HMRC’s £100K Threshold Affects Working Parents
The latest childcare reforms have brought renewed attention to how income thresholds affect eligibility for family support.
September marks the final phase in the extension of free funded childcare hours in England, which could save eligible working parents thousands of pounds a year – said Charlene Young, senior pensions and savings expert at AJ Bell.
But the long-standing £100,000 tax trap could mean this punishes higher-earning parents even further.
At the heart of this issue is adjusted net income (ANI), a figure calculated by HMRC that determines entitlement to various allowances and benefits. Despite its name, ANI includes more than just earnings. It encompasses all income subject to tax—such as salaries, dividends, rental income, and investment returns—minus specific reliefs like pension contributions, charitable donations (Gift Aid), and trading losses.
That means a parent could unknowingly cross the ANI threshold through passive income or a bonus, not just base salary.
A Sharp Drop in Childcare Support After £100,000
Parents earning over £100,000 are no longer eligible for the 30 funded hours of childcare recently introduced in England. Instead, they revert to the universal 15 hours per week, available only during term time, for children aged three and four.
This change alone can reduce annual support by up to £7,000 per child, depending on childcare provider fees and usage.
Families also become ineligible for tax-free childcare, a scheme in which the government pays 20% of childcare costs—up to £2,000 per child per year, or £4,000 for two.
In parallel, child benefit is reduced and eventually eliminated under the High Income Child Benefit Charge (HICBC), which fully removes entitlement once one partner earns £80,000.
why equal-earning households get more support
The way income is distributed between partners can significantly affect a family’s eligibility for childcare support, even when total household earnings are the same.
Young added:
The UK tax system operates primarily on individual earnings, not household income. It means these benefits are not available to a family with one partner earning just over £100,000 and another on £20,000, whereas if mum and dad make £60,000 each, they get the full package of support, giving them a higher family spending power.
This structure creates clear winners and losers. A household with a combined income of £120,000 could either lose or retain all government childcare support, depending solely on how the income is distributed between partners.
Pensions: A Possible Way Out of the Trap
There is, however, one legal workaround that could help families stay below the threshold: modest pension contributions.
Parents might be able to re-arrange their finances to side-step the penalty by making modest pension contributions. This can improve their overall financial position as they regain lost childcare support and boost their retirement pots – said Young.
Because pension contributions are deducted when calculating adjusted net income, even a small increase in pension savings can restore full eligibility for government support programs—while also offering long-term retirement benefits.
For example, a parent earning £101,000 could contribute £2,000 gross into their pension, reducing their adjusted net income below the £100,000 line and reclaiming:
- Their full personal allowance
- Full 30 funded hours of childcare
- Tax-free childcare support
- Child benefit (if applicable)
