Thousands of parents reject pay rises as £100k tax cliff-edge pushes 'perverse choice' on families

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New research has revealed that around 12,000 parents have turned down pay hikes to avoid being pulled into HMRC's £100,000 tax trap

Thousands of parents are increasingly rejecting pay rises to avoid a sizable tax raid from HM Revenue and Customs (HMRC), new research shows.

The number of parents deliberately holding their earnings beneath the £100,000 free childcare threshold is on course to surge by nearly 1,000 per cent before the end of the decade.

Roughly 1,100 parents suppressed their income to stay below the six-figure limit in 2022, the most recent year with available data.

That figure is projected to climb to almost 12,000 by 2030, according to an analysis of HMRC records carried out jointly by the Centre for the Analysis of Taxation, the University of Warwick and the London School of Economics.

The findings lay bare the growing distortions created by a cliff-edge rule, introduced under the previous Conservative government in 2017, that strips away free childcare entitlements the moment a parent's income crosses £100,000.

Since 2010, parents with children in nursery or pre-school have been entitled to claim between 15 and 30 hours of government-funded childcare across 38 weeks each year.

That support vanishes entirely once a single parent's earnings tip past the £100,000 mark. To remain just below the threshold, families are resorting to a range of tactics.

Some channel additional income into pension contributions or charitable donations, while others cut their working hours or turn down pay increases and promotions altogether.

The practice, known as income "bunching," is expected to escalate sharply as wage growth pulls an increasing number of working-age parents towards the cliff-edge.

Alice Jeffries of the Confederation of British Industry said the policy forces families into a "perverse choice" between continuing to work and potentially taking home less, or declining career advancement to preserve their entitlement.

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

Their report confirmed that in households where one parent breaches the earnings cap, it is overwhelmingly mothers who step back from employment to compensate for the lost provision.

Ms Jeffries warned the problem will only intensify, noting the data illustrate how this burden will grow as "more working-age parents are dragged towards the cliff".

A Coram survey found that the average weekly cost of a full-time nursery place for a child under two fell from £305 to £149 between 2024 and 2026, thanks to the expansion of funded hours. Parents who are ineligible, however, face bills of £372 per week.

Earners between £100,000 and £125,140 progressively lose their £12,570 personal allowance, resulting in an effective marginal tax rate of 60 per cent. The report's authors estimated that abolishing the £100,000 childcare threshold entirely would cost £520million by 2028.

A Department for Education spokesman said: "No Government has ever put so much focus or investment into the early years to make sure it reaches the children and communities that need it most, eligible working parents of children from nine months old now able to access 30 hours a week and save an average of £8,000 a year per child."