Worked examplesChildcare and pensions
The £100k childcare trap: why a £10,000 pension payment can leave you £7,120 better off
Earn just over £100,000 with a child in nursery and one extra pound can cost your family £11,120 of childcare support. A pension payment can bring it back for a fraction of the price.
The short answer
+£7,120
better off this year, with £10,000 more in the pension.
A parent on £110,000 pays £10,000 into their pension, gets back under £100,000, and the family's childcare support returns.
The working
- Parent A's salary
- £110,000
- Paid into their pension
- −£10,000
- Income the test sees
- £100,000
- Take-home pay given up
- −£4,000
- Childcare support back
- +£11,120
- Better off this year
- +£7,120
The payment costs £4,000, not £10,000, because income between £100,000 and £125,140 is taxed at an effective 60%.
Most families find the £100,000 cliff edge the expensive way. A pay rise or a bonus lands, the nursery mentions that the funded hours code has stopped working, and the monthly bill doubles.
It isn't a tax band, and it never appears on a payslip. It's a pass-or-fail test: if either parent's income is over £100,000, by as little as a pound, the whole family loses its childcare support. Here is what that costs one family, and why a pension payment can more than pay for itself.
The scenario
| Parent A's salary | £110,000 |
| Parent B's salary | £45,000 |
| Child | 18 months |
| Nursery fees | £1,600 a month |
What one pound over £100,000 costs
In England, working parents of children aged from 9 months to school age can get 30 funded hours a week for 38 weeks of the year: 1,140 hours. At this nursery's rate of £8 an hour, that's worth £9,120 a year.
Tax-Free Childcare then adds 20% to what you pay the nursery, up to £2,000 a child a year.
Both stop if either parent's adjusted net income is over £100,000. Parent A is on £110,000, so this family gets neither.
−£11,120
of childcare support lost every year, because one parent is £10,000 over the line.
The working
| Funded hours: 1,140 × £8 | £9,120 |
| Tax-Free Childcare | £2,000 |
| Support lost | £11,120 |
The move: £10,000 into a pension
Adjusted net income is your taxable income minus pension contributions (and Gift Aid). If Parent A pays £10,000 into their pension, their adjusted net income falls from £110,000 to exactly £100,000.
They're back under the line, and the funded hours and Tax-Free Childcare come back with them.
Why it costs £4,000, not £10,000
This is the part that surprises people. Between £100,000 and £125,140 you lose £1 of your tax-free personal allowance for every £2 you earn. That makes the effective rate of income tax in that band 60% (62% with National Insurance), well above the 45% additional rate.
Run it in reverse and a pension payment in that band gets 60% tax relief:
| Paid into the pension | £10,000 |
| Income tax saved (60%) | −£6,000 |
| Fall in take-home pay | £4,000 |
By salary sacrifice it's cheaper still, about £3,800, because National Insurance is saved too.
The answer
| Take-home pay given up | −£4,000 |
| Childcare support regained | +£11,120 |
| Better off in cash this year | +£7,120 |
| Plus, in the pension | +£10,000 |
The family is £7,120 better off this year and has £10,000 more for later. Nothing clever is going on: the rules simply fit together this way. Pound for pound, that is about as cheap as pension saving gets.
When the maths stops working
The further over £100,000 you are, the less the pension payment pays for itself. Above £125,140 the 60% band ends and tax relief drops to 45%.
Say Parent A earned £140,000 instead. Getting down to £100,000 would take a £40,000 pension payment. That costs £18,229 of take-home pay and brings back the same £11,120 of support, so the family is £7,109 down in cash this year, though £40,000 up in the pension. Whether that trade is worth it depends on what you need the money for now.
The number of children matters just as much. With a second child in nursery the support at stake roughly doubles, and so does the case for the payment.
Bonuses, pay rises and dropping a day
The test covers the whole tax year, 6 April to 5 April, so a bonus counts as much as salary. A £10,000 bonus on a £95,000 salary can leave a family £6,320 worse off than no bonus at all. The bonus worked example shows how, and how putting half of it into a pension turns that into £2,900 of cash plus £5,000 saved.
Working less can do the same job as a pension payment. A parent on £108,000 who drops to four days falls under the line, and their family ends up £237 a month better off. That's in what dropping a day really costs. An electric car through salary sacrifice can do it too, though the car's taxable value is added back on: when a salary sacrifice car pays for itself.
Three ways families still lose the support
- Forgetting to reconfirm. Both schemes need you to reconfirm every three months, or they stop.
- Relief at source. If your pension works this way, the provider adds 20% and you claim the rest on a tax return. Until you do, a £10,000 top-up at £110,000 costs about £8,000, not £4,000.
- Cutting it too fine. Savings interest, a taxable benefit or a late pay rise all count towards the same total. Aiming for exactly £100,000 leaves no room for any of them.
It's per person, not per household
Each parent is tested on their own income. A family with two parents on £99,000 each (£198,000 between them) keeps all its support. A family on £101,000 and £30,000 (£131,000) loses it.
The Child Benefit charge works the same way, on the higher earner alone, but without a cliff: it rises gradually between £60,000 and £80,000. How that one works, and why it makes pension payments in that band unusually cheap too.
General information, not financial advice. 2026/27 rates for England, Wales and Northern Ireland; Scottish income tax differs and funded hours are England-only. Pension money is usually locked away until 57 (55 until April 2028). Speak to a regulated adviser before acting.