High earning parents have been advised to take action to protect their finances if they are offered a pay rise that puts their earnings over £100,000.
Finance experts say this six-figure salary puts workers on a cliff edge where they risk falling into a trap in which tax bills rise and they lose access to valuable free childcare.
However, it is possible to escape these penalties by diverting cash into a private pension in order to bring the headline salary below £100,000 while also boosting a nest egg that will fund a comfortable retirement.
Experts at AJ Bell suggest someone earning just over £100,000 could divert just £800 to their pension and then be able to reclaim £11,330 in tax and lost childcare benefits.
The organisation also pointed out that a family with two children could miss out on a combined £20,000 of child care support if either parent allows their headline pay to tip over the £100,000 threshold.
AJ Bell pensions and savings expert, Charlene Young, said the situation has been made worse for high income workers because unless they can bring their headline salary below six figures, they will lose out on extra free childcare hours that are being offered this year and will be extended again in September 2025.
She said: “Whilst 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.”
She advised: “Parents with high salaries should sit down and work out the numbers to see if they can re-arrange their finances to boost their overall financial position and side-step the tax system’s most egregious penalties on high earners.
“By making modest pension contributions this group can regain lost childcare support whilst boosting their retirement pots, and in many cases boost their net spending power.”
Explaining the problem, she said: “It all comes down to something the taxman calls ‘adjusted net income’.”
“For families trying to work out how their earnings might impact access to childcare subsidies and child benefit, the first thing to work out is something called your ‘adjusted net income’.
“Despite the name, it refers to all income that would be subject to tax. So not just earnings, but income from investments, savings, and property too.”
She warned that if a parent has adjusted net income of over £100,000 for a year, they lose all entitlement to tax-free childcare, worth up to £2,000 per child; all the current 15 hours of funded childcare hours on offer for children aged 9 months to 3; and half of the 30 hours for children aged between three and four.
Ms Young said on top of this, workers on more than £100,000 begin to lose their annual tax-free personal allowance of £12,570. For every £2 earned over £100,000 a worker loses £1 of their personal allowance with the effect it is wiped out completely with a salary of £125,140 and above.
As a result, she said: “In total, families with two children aged 9 months and 2 years old could miss out on nearly £13,000 this academic year, rising to £20,000 of additional support by September 2025.”
She said an “egregious” anomaly in the tax regime means a household with one parent earning more than £100,000 is denied the childcare support – however, one where two parents are earning a combined £120,000 can make a claim.
