If you’re a high earner with young children, first of all well done, but here’s something that might catch you off guard: once your income creeps over £100,000, even by a single pound, you’re forced to kiss goodbye to those 15 or 30 hours of free childcare a week.

Not reduced. Not renegotiated. Gone. Simple as that.

This has taken quite a few of my clients by surprise. I’m talking about hardworking doctors, dentists, consultants, business owners. People whose earnings look great on paper, but who suddenly find themselves forking out a big lump sum each month for childcare they were previously getting help with. AKA a less-than-ideal situation to be in.

The £100k rule: A pricey threshold

The moment your adjusted net income goes over £100,000, you no longer qualify for the 30 free hours of childcare per week. That support was worth thousands each year. And then it’s off the table. Just like that. With no warning.

It doesn’t matter if your income hits £100,001. There’s no gradual phasing out. Just an abrupt end to any sort of help.

If both parents work and meet the eligibility rules, this benefit can be a real turning point. But once one of you crosses that £100k mark, it’s gone. That can sting, especially when you’re already trying to keep up with rising mortgage rates, tax rises, and all the usual costs of having kids under five.

So what counts towards the £100k?

Here’s what your ‘adjusted net income’ includes:

• Your salary or self-employment income
• Rental income
• Dividends
• Any other taxable income
• Less pension contributions (we’ll get to that in a second)

So, if you’re edging close to the line, don’t panic yet. There are ways to bring your income back under £100,000 legally and efficiently. Let me explain how.

1. Pension contributions

This is the big one.

You can put up to £60,000 a year into your pension tax-free (subject to allowances and reducing if you earn more than £200k).

So if you’re earning £105,000, a pension contribution of £5,000 could bring your adjusted net income back under £100k. Not only do you keep your childcare support, you also boost your retirement pot and reduce your tax bill. Sounds nice doesn’t it?

It’s essentially a triple win.

A lot of business owners and limited company directors have some flexibility in how they pay themselves. Instead of taking that chunky dividend this year, consider a pension top-up.

Alright, you’re locking the money away until you’re getting on for 60 (at least), but the long-term gain often outweighs the short-term childcare spend.

2. Salary sacrifice schemes

Not quite as powerful as pensions, but every little helps. Just be aware that not everything qualifies, and some things that sound clever (like taking cash instead of a company car) don’t always count in your favour. Always best to check first.

Schemes like:

• Cycle to work (not something you’d catch me doing, but a lot of you are much fitter than me!)
• Electric vehicle leases
• Extra pension contributions (something you’ll thank yourself for later)
• Tech purchase schemes (laptops, phones etc.)

These reduce your gross income, which in turn lowers your taxable income. If you’re just slightly over the £100k mark, salary sacrifice might just tip the scales in your favour.

Have a word with your employer or accountant to see what’s available and what’s worth using. And don’t wait until the end of the tax year – you ideally want these in place sooner rather than later.

3. Employing your life partner

This one’s not for everyone, but it can work well in the right setup.

If your partner helps with the admin, invoicing, diary management, or any actual tasks in the business, you can legitimately employ them and pay them a salary.

Done properly, that salary becomes a business expense, which reduces your profits (and potentially your income below the threshold).

But here’s the key part: they must actually do the work, and you need to pay them at a reasonable rate for what they’re doing. No funny business. HMRC has no issue with this if it’s all above board. If it looks dodgy or inflated, you’ll have them knocking at your door.

Don’t get caught off guard

This isn’t about dodging tax or playing games. It’s about understanding the rules and making them work for you. Every one of the strategies above is entirely legal and HMRC-approved. But they do need to be carried out properly and documented the right way.

And a quick one to clear up while we’re here: school supplies and childcare bits aren’t deductible business expenses. Trying to put those through your company might seem clever, but it’s a guaranteed way to get HMRC sniffing around. Just don’t do it.

Get in touch with your accountant (or me) before making any big moves. The worst thing you can do is rush in and make it ten times worse.

Keep a tight grip on free childcare

Hitting six figures in earnings feels like a milestone, and it is one to be proud of. But like all good things, there’s a catch. Especially where HMRC is involved, it comes with hidden costs and disappearing benefits. If you’ve got young kids, the loss of childcare support can be a brutal one to add to the list.

So if you’re on the edge, do the maths. And if there’s a smart way to keep your income under that magic £100k line, without doing damage to your future finances, why wouldn’t you?

Sorted properly, you can have the best of both worlds: a growing income and the support you’re entitled to.

Drop me a line if you need a hand going through it all properly. Or share this with someone who might be about to get caught out. Better to know now than get a nasty bill come September. And timing is everything. Don’t wait until your income goes over the line. Otherwise, it’s too late.

 

Interested to find out more?

Call us on 01617 985789

Or book a meeting at https://calendly.com/d/ckfd-tzk-zbb