Thousands of parents turning down pay rises to avoid £100,000 tax trap

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Around 12,000 parents are expected to deliberately keep their earnings below £100,000 by 2030 to hold on to free childcare

Thousands of parents are being forced to choose between earning more and holding on to valuable childcare support.

The problem is set to become far more widespread, with around 12,000 mothers and fathers expected to deliberately keep their earnings below £100,000 by 2030 to avoid losing their free childcare entitlement, according to new analysis.

That would be almost 11 times the 1,100 parents who kept their income below six figures in 2022, the latest year for which data is available.

Growing numbers are now "bunching" their incomes just below the £100,000 threshold by increasing pension contributions, cutting their working hours, turning down promotions or refusing pay rises, according to research by the Centre for the Analysis of Taxation, the University of Warwick and the London School of Economics using HMRC data.

The reason is the sharp financial cliff edge facing families once a parent crosses the threshold.

If either parent earns more than £100,000, the household can lose its entitlement to government-funded childcare hours. The limit was introduced by the previous Conservative government in 2017.

For some families, earning just £1 more could leave them thousands of pounds worse off.

A family with a two-year-old in nursery could face an additional childcare bill of £16,500 if a parent's income rises from £100,000 to £100,001, according to the Centre for British Progress.

The childcare hit comes on top of another costly quirk in the tax system for people earning six figures.

Once income exceeds £100,000, the £12,570 personal allowance is gradually withdrawn. This means people earning between £100,000 and £125,140 can face an effective marginal income tax rate of 60 per cent.

The report's authors described the childcare threshold as "a notch in the tax system", where earning slightly more can leave a family worse off overall, warning that the scale of the problem has increased in recent years.

Women are being disproportionately affected, with Alice Jeffries, of the Confederation of British Industry, warning that families face a "perverse choice" between progressing at work and potentially taking home less overall, or turning down career opportunities to keep their childcare support.

Ms Jeffries said: "The impact of this choice is felt mostly by mothers. Women whose partners earn over £100,000 are 50pc more likely to leave the workforce after losing childcare support than women whose partners earn below £100,000."

The CBI warned the problem is only likely to get worse as "more working-age parents are dragged towards the cliff".

Close to 100,000 children were denied free childcare in 2025-26 because their families did not qualify, according to Government figures obtained through Freedom of Information requests.

That is more than three times the 30,800 children who were ineligible in 2023-24, as frozen thresholds leave growing numbers of families caught by the £100,000 limit.

Several changes could ease the pressure on parents, including scrapping the threshold altogether, which the report estimates would cost the Government around £520million in 2028.

Another option would be to raise the limit to between £125,000 and £150,000, or gradually reduce the amount of free childcare parents receive as their earnings rise instead of removing the entire entitlement at once.

A cheaper alternative would allow all parents of children under three to keep the first 15 hours of free childcare regardless of their income.

The report estimates this would halve the financial cliff edge for affected families and cost around £210million by the end of the decade.

The difference in childcare costs for families who miss out can be substantial.

The average cost of a full-time nursery place for a child under two fell from £305 a week in 2024 to £149 in 2026 for parents benefiting from the expanded free childcare scheme, according to a Coram survey.

Parents who were not eligible for the support, however, faced an average bill of £372 a week.

Sarah Coles, of pension provider AJ Bell, said she did not expect the Chancellor to prioritise this issue in the forthcoming autumn Budget.

Ms Coles said: "It's hard to see that any of these options will be a priority for the Government, let alone make it to the Budget. It would be incredibly unexpected for the Chancellor to use any of his limited wiggle room to ease the pressure on very high earners."

A Department for Education spokesman defended the Government's record, stating that no previous administration had invested as heavily in early years provision. The spokesman said eligible working parents of children from nine months old can now access 30 hours a week, saving an average of £8,000 annually per child.

The department added that its ongoing Childcare Review aims to make the system "simpler and fairer for every family".