How Salary Sacrifice Can Bring You Under the £100k Threshold for Tax-Free Childcare

Tax-Free Childcare and the funded childcare hours schemes both use the same rule: if either parent’s adjusted net income goes even £1 over £100,000, the household loses the support entirely. Unlike the Personal Allowance taper, there’s no gradual reduction here — it’s a genuine cliff edge. For parents close to that line, salary sacrifice into a pension is one of the most direct ways to pull income back under it.

Why this is a cliff edge, not a taper

The Personal Allowance taper (see our separate article on the 60% tax trap) reduces your allowance gradually between £100,000 and £125,140. Tax-Free Childcare and the 15/30 funded hours schemes don’t work that way: each parent is individually tested against a strict £100,000 adjusted net income limit, and going even slightly over removes the support completely for that tax year. There’s no partial loss — you either qualify or you don’t.

What’s at stake

• Tax-Free Childcare: up to £2,000 a year per child in government top-ups (£4,000 for a disabled child), based on the government adding £2 for every £8 you pay into a dedicated childcare account.
• Funded childcare hours (the 15 or 30 hours schemes for eligible pre-school children in England): these use the same £100,000 per-parent test, so crossing the threshold can mean losing free childcare hours worth thousands of pounds a year, on top of losing Tax-Free Childcare.

How salary sacrifice helps

Salary sacrifice reduces your official contractual salary, and pension contributions — whether via salary sacrifice or a personal contribution — reduce your adjusted net income for this test. Because Tax-Free Childcare is a cliff edge rather than a taper, even a modest pension contribution that brings you from just over £100,000 to just under it can restore the entire benefit, not just a proportion of it.

A worked example

Take a parent earning £105,000 with two children in registered childcare:

• At £105,000 adjusted net income, this parent’s household is not eligible for Tax-Free Childcare or funded hours at all — regardless of what the other parent earns.
• A £6,000 gross pension contribution via salary sacrifice brings adjusted net income down to £99,000 — back under the £100,000 line.
• This restores Tax-Free Childcare eligibility (worth up to £2,000 per child per year — £4,000 total for two children) and, where applicable, funded childcare hours.
• Layered on top of the usual salary sacrifice Income Tax and National Insurance savings on that £6,000, the net cost of the pension contribution can end up considerably lower than the value of the benefits restored.

Check both parents individually

The £100,000 test applies to each parent separately, not household income. A couple earning £70,000 and £70,000 (£140,000 combined) both pass the test, while a couple earning £105,000 and £20,000 fails it entirely — because one parent is over the individual limit. If you’re the higher earner in a couple close to £100,000, your own pension contributions are what matters for this test, regardless of your partner’s income.

Reconfirm eligibility every three months

Tax-Free Childcare requires you to reconfirm your expected income every three months through your online account. If your income is fluctuating near the £100,000 line — for example, due to a bonus or overtime — it’s worth reviewing your pension contributions each quarter, not just once a year at the tax year end.

The bottom line

Because Tax-Free Childcare and funded hours use a hard income cliff rather than a gradual taper, a relatively small, well-timed pension contribution can restore support worth thousands of pounds a year for a family with young children in childcare. If you or your partner are hovering near £100,000, this is one of the highest-value checks you can make each tax year.