The £100K Childcare Cliff: When a Pay Rise Costs More Than It Pays

Cross £100,000 and you can lose more than you gain

At £100,000, a £1,000 pay rise adds £380 to your take-home — and if it tips your adjusted net income over the threshold, it can simultaneously end every penny of your government childcare support. For a parent using Tax-Free Childcare and the 30 funded hours, that trade can cost more than the rise pays: an effective marginal rate above 100%.

The tax side of this is the well-known 60% tax trap — 40% income tax, plus 20% from the Personal Allowance taper, plus 2% National Insurance, leaves 38p from each extra pound between £100,000 and £125,140. The childcare side is less discussed and sharper, because it is not a taper. It is a cliff.

Two schemes, one cliff edge

Two separate schemes hang off the same £100,000 test:

• Tax-Free Childcare — the government adds £2 for every £8 you pay into a childcare account, up to £2,000 per child per year (£500 per quarter). Per GOV.UK, you are not eligible if you or your partner have adjusted net income over £100,000.
• 30 hours of funded childcare — the working-parent entitlement in England. The same rule applies: either parent over £100,000 adjusted net income and the household loses the working-parent entitlement.

Both are all-or-nothing. There is no phase-out band: £99,999 qualifies in full, £100,001 qualifies for nothing. And because the test applies to each parent individually, one parent crossing the line ends eligibility no matter what the other earns.

The maths of going just over

The tax figures are exact (2026/27, standard tax code — verify them in the take-home table):

• A £1,000 rise at £100,000 nets you £380.
• A £5,000 rise (to £105,000) nets you £1,900.

Now set that against what the cliff takes away. The Tax-Free Childcare top-up alone is worth up to £2,000 per child per year. A parent claiming the full top-up for one child who accepts a £5,000 rise gains £1,900 in take-home and loses up to £2,000 in support — worse off overall, before the 30 funded hours are even counted. The cash value of the funded hours depends on your provider’s rates and how many weeks you use, but for families with a child in nursery full-time it is typically the larger of the two losses.

That is the compounding effect in one sentence: in this zone, a rise that looks like £5,000 on paper can arrive as a net loss — the marginal cost of earning more can exceed 100%.

It’s adjusted net income, not salary

The threshold is tested against adjusted net income — broadly, total taxable income minus gross pension contributions and Gift Aid donations (GOV.UK’s definition). Your headline salary is not the number that matters.

This is why the standard response to the cliff is pensions: many people in this band contribute enough to their pension to bring adjusted net income below £100,000. Doing so preserves Tax-Free Childcare and the funded hours and restores the Personal Allowance — the same contribution defuses both the cliff and the 60% trap at once. Whether that is right for you depends on your cash-flow needs and circumstances; this describes how the rules work, not what you should do.

Check where you stand before the rise lands

If an offer, bonus, or pay review is about to carry you across £100,000, run the numbers first. The UK Salary Calculator shows your take-home with pension contributions and salary sacrifice applied, so you can see exactly what level of contribution keeps adjusted net income below the threshold — and compare keeping the support against taking the cash. For the wider picture of what pay rises are worth at every level, see what you actually keep from a £10,000 rise.