The £100k Childcare Cliff Edge: How to Protect Your Entitlement

If either parent has an adjusted net income above £100,000, your household loses eligibility for funded childcare: the 15 hours for under-3s, the 30 hours for 3-4 year olds and Tax-Free Childcare all disappear. For a family in a high-cost area, that cliff edge is worth more than £7,000 per year.

The good news is that "adjusted net income" is not the same as your salary. There are legal ways to bring it below £100,000, and many families earning £100,000-£120,000 qualify once those adjustments are accounted for.

What adjusted net income means

Adjusted net income is the figure HMRC uses to assess eligibility for government childcare entitlements. It is your gross income minus pension contributions, Gift Aid donations and trading losses. It is not the same as your salary or your P60 gross figure.

Adjusted net income is not your gross salary. It is calculated as:

Adjusted net income = gross income - pension contributions (relief at source) - Gift Aid donations - trading losses

Salary sacrifice pension contributions (where your employer reduces your pay before tax) reduce your gross salary and therefore your adjusted net income directly. This is the most commonly used lever.

Personal pension contributions made from your bank account (not via salary sacrifice) are added back via Gift Aid-style relief and also reduce adjusted net income.

What you stand to lose above £100k

The exact value depends on your child's age and your LA's funding rate.

15 funded hours (9 months to 3 years):

15 hours x 38 weeks = 570 funded hours per year
At an average LA rate of £6.50/hr to nursery: value of funding = £3,705/year
At a typical London nursery charging £14/hr: your cost without funding = £7,980/year

30 funded hours (3-4 year olds, working parents):

30 hours x 38 weeks = 1,140 funded hours per year
At £6.50 average LA rate: value = £7,410/year
At London commercial rate £14/hr: your cost without funding = £15,960/year

The difference between qualifying and not qualifying for 30 hours at a London nursery is approximately £8,000-£10,000 per year in commercial costs.

Tax-Free Childcare:

Up to £2,000/year government top-up per child
Also lost above £100k

Combined, a family above the cliff edge and below £120k adjusted net income may be foregoing £9,000-£12,000 of annual value from funding and TFC.

How salary sacrifice pension contributions help

If your employer offers salary sacrifice for pension contributions, each pound you sacrifice reduces your gross salary (and therefore your adjusted net income) by £1.

Example: You earn £107,000 gross. You need to reduce adjusted net income to £99,999. You contribute £7,001 per year to your pension via salary sacrifice. Your adjusted net income = £99,999. You now qualify for all funded hours entitlements.

The net cost of those pension contributions is lower than it appears because:

You avoid the 60% effective marginal tax rate that applies between £100,000 and £125,140 (where your personal allowance is tapered at £1 per £2 earned above £100k)
The pension contribution itself builds your retirement pot

At an effective marginal rate of 60%, a £7,000 pension contribution costs you £2,800 in take-home pay but restores £7,200+ in childcare funding. The maths strongly favours contributing.

The 60% trap: why the cliff is steeper than it looks

Between £100,000 and £125,140, your personal allowance is reduced by £1 for every £2 of income above £100,000. Once it is fully withdrawn, you pay 40% tax on income that was previously tax-free.

This means your effective marginal rate in this band is 60%: 40% income tax plus 20% from the personal allowance withdrawal.

A salary of £107,000 faces:

60% effective rate on £7,000 of income (the amount above £100k to the point where allowance is halved)
Loss of 30-hour childcare entitlement on the full value above

For families with young children in this income band, the financial priority is usually to reduce adjusted net income below £100,000 rather than accept the cliff.

What to check and do

Step 1: Calculate your adjusted net income. Start with your P60 gross figure. Subtract any pension contributions made via salary sacrifice (they will already be absent from your gross figure on your payslip). Subtract any personal pension contributions and Gift Aid donations.

Step 2: Check whether you are above or below £100,000. If you are above: work out how much you need to contribute to pension to bring it below. Your employer's HR or payroll team can confirm whether salary sacrifice is available and what the process is.

Step 3: Check your partner's income too. The £100,000 limit applies to either parent individually, not combined household income. If your partner earns £105,000 and you earn £60,000, you lose eligibility even though combined income is £165,000.

Step 4: Use the grace period if you have just gone over. If your income has risen above £100,000 and you were previously receiving funded hours, you have one term's grace period before the entitlement stops. Use that time to arrange pension contributions before your code is cancelled.

Step 5: Model the saving. The saving from retaining funded hours versus losing them is significant enough that most families in this income band benefit from getting a formal calculation done. The Clear Nursery Fees calculator shows the full value of your funded hours entitlement at your LA's rate, so you can compare it against the cost of the pension contributions needed to stay below £100k.