You’d think that working more and earning more means you’re always better off. But this isn’t always true, especially for parents. One threat for parents is crossing the £100,000 income boundary and losing your entitlement to 30 hours of free childcare.
The good news? Pensions contributions can be a clever way to sidestep it.
Why is the £100,000 ‘childcare cliff’ so dangerous?
Working parents in England and Wales are now able to claim 30 hours of free childcare per week - up to 1,140 hours a year. This is for children aged nine months to four years and must be claimed during term time. With average nursery fees often topping £8 an hour, it can represent a saving of several thousand pounds a year.
So far so good. But here’s the sting - if either parent’s adjusted net income creeps over £100,000, the free childcare hours vanish. Even if you’re just £1 over the line.
That’s no small loss. Imagine expecting a £6,000 saving on childcare and suddenly discovering it’s gone, all because of a bonus or extra income you didn’t factor in.
And working out your adjusted net income isn’t always straightforward. It includes:
your salary;
any dividends;
interest;
bonuses; and
rental income.
So even a modest bonus or small amount of additional income could tip you over.
Once you pass £100,000, you also start to lose your Personal Allowance. For every £2 you go over, you lose £1 of allowance. That’s why the effective tax rate in that band can creep up towards 60% when you factor in lost allowance, Income Tax and National Insurance (NI).
For some, earning more can actually leave you worse off.
How can pension contributions help?
This is where pensions come in. Pension contributions lower your adjusted net income. This means you can use them to bring yourself back under the £100,000 threshold and hold onto your free childcare hours.
Here’s a simple example. Imagine your adjusted net income will be £100,600 this year. If you make a pension contribution of £700 (or use salary sacrifice), your adjusted net income falls to £99,900. You keep the 30 hours of free childcare and boost your pension savings at the same time. It’s not a loophole or a trick - it’s simply how the system is designed.
What do I need to be aware of?
Before you start adding extra money into your pension, there are some important points to keep in mind.
Only certain contributions count - payments that qualify for tax relief or go through salary sacrifice reduce your adjusted net income, not deposits into a regular savings account.
Know your limits - pension contributions are capped by the annual allowancewhich is £60,000 per year for most people (2025/26). If you’re an additional rate taxpayer earning over £260,000 per year, your annual allowance may taper down.
Get your estimates right - you need to include all income sources and deductions when you calculate adjusted net income. Miss something - like a dividend, bonus or rental income - and you could be caught out.
Remember pensions are long term - money you contribute to a pension is generally locked away until retirement age which for most modern workplace or personal pensions is 55 (rising to 57 from 2028). Whereas the UK State Pension age is currently 66 (rising to 67 from 2028). So don’t treat your pension contributions as easily accessible savings.
Check with your employer - some employers limit how often you can change contribution levels, which matters if your income includes irregular bonuses. If you’re a PensionBee customer, you can make completely flexible contributions.
Think about the whole household - the £100,000 income threshold applies per parent. But once one person crosses it, the whole family loses the entitlement.
Watch the timing - you have to reconfirm eligibility for the free childcare hours every three months. If your income changes mid-term, this could impact your entitlement.
What can I do now to protect my free childcare hours?
If you’re concerned that your income could be going to hit the £100,000 threshold, here’s what you can do to make sure you’re protected.
Model your adjusted net income as accurately as possible - add together all of your income streams including your salary, dividends, interest, rent and bonuses, and subtract expected deductions, including pension and gift aid.
Aim for a safety margin - don’t target exactly £100,000. Leave wiggle room for forecast errors, fluctuations or surprise income.
Talk to your employer - ask whether pension contributions via salary sacrifice are offered. This could make things simpler as your employer will take the money straight from your pay before you even see it.
Adjust early in the tax year - if you know bonuses or extra income may come, make changes to your adjusted net income as early as possible.
Monitor quarterly childcare re-declarations - when you confirm eligibility every three months, update your forecasts.
Get specialist help if needed - if you have multiple income sources or complicated investments, a qualified Independent Financial Adviser (IFA) or tax specialist can help.
Crossing the £100,000 income line can cost families far more than they realise. The right pension contributions can help you avoid that trap, protecting your entitlement to childcare support and your long-term retirement savings.
It’s worth carefully considering how you can use your pension to make sure you don’t end up worse off just by earning a little more.
Jo Middleton is a Lifestyle and Personal Finance Writer who strongly believes that everyone should be empowered to not just understand their bigger financial picture, but thrive as part of it. She’s written for The Guardian, The Times, iNews, Online Mortgage Advisor, Boring Money and many more. Jo splits her own spare cash between savings, investments, pets and trips to the seaside.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
