High-earning parents in the UK are set to lose out on over £20,000 of childcare support annually due to recent government changes, according to new data.

The old Conservative government introduced measures on September 1 to provide 15 hours of free weekly childcare for children aged nine months to three years. However, families where one parent earns more than £100,000 are excluded from this support.

A family with a main breadwinner earning £126,000 could be worse off than one earning £99,000 due to the loss of childcare benefits and other support schemes. The new system puts high-earning families on a “cliff edge”, as they also miss out on other benefits like the £2,000 tax-free childcare scheme. To qualify for the new childcare support, each parent must earn between £9,518 and £100,000 annually. There is no limit on combined household income, provided neither parent exceeds £100,000 individually.

The scheme will expand further from September 2025, offering 30 hours of free childcare for all under-fives during term time.

Analysis by investment platform AJ Bell has shown the stark impact on high earners. A family with one high-earning parent and two children under two could lose £20,000 worth of childcare support annually from the next academic year, compared to a middle-income family with a main earner on £60,000. This year, high-earning families are already set to lose £13,000 in support. Experts believe that while many working parents will welcome the latest extension of funded childcare hours, a distortion in the tax system means that the cliff edge for high-earning parents will worsen. The thresholds for childcare support are based on adjusted net income, which includes earnings, investments, savings and property income. Bonuses are also factored in.

Under the current rules, a family with two children aged one and two – where the breadwinner earns £99,000 but gets awarded a bonus of £2,000 – would be classed by the government as earning an adjusted net income of £101,000. This small increase has significant consequences. Due to the warped rules, this £2,000 pay rise ends up costing them nearly £10,000, an effective tax rate of almost 500%.

How to avoid the tax trap:

One of the simplest things you can do is make pension contributions.

When the government looks at your income to decide if you can get childcare help and how much tax-free income you’re allowed (your Personal Allowance), they look at something called your “adjusted net income”.

This is essentially your total earnings minus any money you put into your pension via personal contribution. So if you earn £126,000 but put £26,000 into your pension, the government treats you as if you only earn £100,000 when deciding your childcare benefits and tax allowances.

Using the same example of someone earning £126,000, they could:

• Make a £26,000 gross contribution to their pension.
• They actually only pay £20,800 (as the government adds £5,200 in tax relief).
• They later claim back another £10,400 in tax relief via their tax return.
• This means the final net cost to them from their £26,000 contribution would only be £10,400.
• This would reduce their adjusted net income to £100,000, which would then reinstate the full childcare support, meaning in theory, they have saved a further £21,259.

A Venture Capital Trust (VCT) can also help you in reducing your adjusted net income. Read our blog post on VCTs here.

The bottom line is that a pension contribution can be a game-changer and enable you to reinstate the full childcare support and your Personal Allowance.

If you have any questions on pension contributions or want to know if your pension is working for you, get in contact on 01935 848764.