£100k Childcare Cliff Edge Explained
Published 1 May 2026 · Last reviewed 12 May 2026
Reviewed by SDB Technical Services
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Information only. This article is for general information and does not constitute financial or tax advice. Tax rules and government policy can change. Speak to a qualified financial adviser or tax professional before making decisions based on your income or pension position. For official guidance, see HMRC: adjusted net income and Childcare Choices.
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. See HMRC's official definition.
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 (see Tax-Free Childcare on GOV.UK)
- 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.
Worked example: salary sacrifice at three income levels
The table below shows the impact of salary sacrifice for a family with a 3-year-old in an average-cost LA (£6.50/hr funded rate, 30 hours, 38 weeks). Figures are illustrative; your actual position depends on your employer's salary sacrifice scheme and your personal tax position.
| Gross salary | Pension sacrifice needed | Adjusted net income | 30h entitlement | Estimated annual childcare saving |
|---|---|---|---|---|
| £99,000 | £0 | £99,000 | Yes | (baseline) |
| £107,000 | £7,001 | £99,999 | Yes (restored) | ~£7,410 in funded hours + up to £2,000 TFC |
| £107,000 | £0 | £107,000 | No | Loss of ~£9,410 vs baseline |
LA funded rate source: DfE EYNFF rates 2026/27. Tax rate source: HMRC Income Tax rates.
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. HMRC publishes a worked example of adjusted net income.
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. See eligibility rules on Childcare Choices.
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.
Frequently asked questions
What is the £100k childcare cliff edge?
If either parent has an adjusted net income above £100,000, the household loses eligibility for funded childcare, including 15 and 30 free hours and Tax-Free Childcare. For families in high-cost areas, this loss can exceed £7,000 per year.
What is adjusted net income?
Adjusted net income is the figure HMRC uses to assess eligibility. It is your gross income minus pension contributions made via salary sacrifice or relief at source, Gift Aid donations, and trading losses. It is not the same as your salary or P60 gross figure. See HMRC's official definition.
Can salary sacrifice pension contributions help me keep funded childcare?
Yes. Salary sacrifice pension contributions reduce your gross salary and therefore your adjusted net income directly. If your income is between £100,000 and £125,140, contributing enough to bring adjusted net income below £100,000 restores your childcare entitlement. At a 60% effective marginal rate in this band, the pension contribution costs less in take-home pay than the childcare funding it unlocks.
Does the £100k limit apply per parent or per household?
Per parent. If either parent individually has an adjusted net income above £100,000, the household loses eligibility, even if the other parent earns far less.
What is the grace period if I have just gone over £100k?
If your income rises above £100,000 and you were previously receiving funded hours, you have one term's grace period before the entitlement stops. Use this time to arrange pension contributions before your eligibility code is cancelled.
Related guides
- Back to Work After Nursery: The MathsWorked examples for £28k, £35k, £50k and £80k salaries showing real take-home after nursery costs, Tax-Free Childcare and Universal Credit. England 2026.
- Why Isn't My Nursery Bill Going Down?Signed up for 30 funded hours but your bill barely moved? Here is why the nursery funding gap exists, what charges are legal, and your actual exposure.
- Stretched vs Term-Time Nursery Funding30 hours term-time vs 22 hours stretched: both use 1,140 funded hours. Monthly bill comparison and decision table by working pattern for England 2026.