Thousands of UK families are losing up to £874 million in government-funded childcare support annually because their parents' incomes have surpassed a £100,000 earnings threshold that has remained frozen. The Department for Education estimates that between 50,500 and 99,000 children were affected by this income limit in the last tax year, according to figures obtained through a Freedom of Information request by Quilter.
As more parents earn over £100,000, they become ineligible for the working parents' funded childcare entitlement, which includes tax-free childcare and 30 hours of free childcare. This threshold was established when £100,000 represented a significantly higher income, and its stagnation means more families are now falling into this bracket.
Increasing Impact of Frozen Thresholds
The number of children impacted by these frozen thresholds has nearly quadrupled since 2021, when the freeze on income tax bands was introduced. In 2021, an estimated 13,800 to 27,100 children were affected, resulting in up to £101 million in lost support. By the 2024-25 tax year, this number had risen sharply, with the estimated number of affected children between 46,400 and 91,300, leading to up to £469 million in unavailable government support.
This increase partly reflects the expansion of childcare support to younger age groups. In 2018-2019, funded hours were available for three and four-year-olds, but this has since been extended to children aged between nine months and two years old in the 2024-25 tax year. By 2025-26, these eligible younger children are set to receive up to 30 hours of support.
Had the childcare threshold increased in line with inflation since its introduction, it would now stand at £137,000, according to analysis. Financial planner Ian Futcher of Quilter noted that a threshold once affecting a small number of families now has a much wider impact. He explained that as earnings and childcare costs have risen, more families are caught by rules designed for a different economic climate.
Disincentives for High Earners
Parents earning between £100,000 and £125,150 face a 60% marginal tax rate. This is because for every additional pound earned above £100,000, 50 pence of their tax-free personal allowance is withdrawn. This situation has led to calls for urgent reform, as it may distort behavior, hinder earnings growth, and discourage long-term investment.
Research indicates that a significant percentage of high earners have taken steps to avoid crossing the £100,000 threshold. Studies show that approximately 28% have turned down promotions, and a quarter have refused bonuses or pay rises. Futcher highlighted that many households are realizing they have crossed a line that causes a substantial shift in their financial standing. He added that the childcare threshold's proximity to the personal allowance taper can make individuals question the actual financial benefit of earning more.
Strategies for Navigating Thresholds
To mitigate the impact of these high tax bands and the childcare cliff edge, strategies focusing on adjusted net income, rather than salary alone, can be employed. Increasing pension contributions is one effective method, as it can not only improve retirement outcomes but also help maintain access to childcare support and other tax allowances. Futcher suggested that understanding these thresholds can make a significant difference to family finances. Other considerations include utilizing salary sacrifice arrangements and reviewing the impact of bonuses and taxable benefits.