Thousands of families in the United Kingdom are losing up to £874 million in government-funded childcare support annually due to a frozen income threshold, according to new figures. The £100,000 earnings limit, at which childcare support is removed, has remained unchanged while parents' incomes have risen.
The Department for Education estimates that between 50,500 and 99,000 children were affected by this earnings limit in the last tax year. This means that as more parents exceed the £100,000 income mark, they become ineligible for essential benefits like tax-free childcare and 30 hours of free childcare for their children.
This issue has escalated significantly 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 families losing up to £101 million. By the 2024-25 tax year, the number of affected children had nearly quadrupled, with an estimated loss of up to £469 million in support.
The expansion of childcare support to younger age groups, from 15 funded hours a week for three and four-year-olds in 2018-2019 to up to 30 hours for children aged nine months to two years old by 2025-26, has also contributed to a larger eligible population. However, the frozen threshold means that had it increased in line with inflation since its introduction, it would now stand at £137,000.
Financial planners note that a threshold that once affected a small number of families now has a much wider impact. While £100,000 is a high income, its value has diminished since the threshold was set, leading more families to be caught by rules designed for a different economic climate. Parents earning between £100,000 and £125,150 also face a marginal tax rate of 60% due to the tapering of the tax-free personal allowance, where 50 pence of allowance is removed for every extra pound earned.
Calls for reform of the threshold have emerged, as it risks distorting behavior and hindering earnings growth and investment. Research indicates that a significant portion of high earners have taken steps to avoid crossing this threshold, with some declining promotions, bonuses, or pay raises. This situation can lead individuals to question the financial benefits of earning more when the loss of childcare support and the impact of the personal allowance taper significantly alter their financial position.
Strategies to mitigate these effects include increasing pension contributions, as eligibility is based on adjusted net income rather than salary alone. This approach can help preserve access to childcare support and other tax allowances, potentially making a substantial difference to family finances. Reviewing salary sacrifice arrangements and the impact of bonuses and other taxable benefits are also advised.