When a Pay Rise Costs You Tax-Free Childcare in 2026/27

For most workers a pay rise is unambiguously good. For a parent whose income is approaching GBP 100,000, it can be one of the few situations where a raise leaves you genuinely worse off. The reason is the cliff edge built into Tax-Free Childcare and the 60% tax trap that sits at the same point.

Two penalties at GBP 100,000

Adjusted net income above GBP 100,000 triggers two things at once in 2026/27:

• The Personal Allowance is withdrawn at GBP 1 for every GBP 2 earned, gone entirely at GBP 125,140. This creates a 60% effective tax rate on that band.
• Tax-Free Childcare and the funded childcare hours are withdrawn completely if either parent crosses GBP 100,000. There is no taper. One pound over the line removes the benefit.

It is the childcare cliff that can flip a raise into a loss.

What Tax-Free Childcare is worth

Under the scheme, the government tops up your childcare account by GBP 2 for every GBP 8 you pay in, up to GBP 2,000 per child a year, or GBP 4,000 for a disabled child. A family with two children can therefore receive up to GBP 4,000 of support that vanishes above GBP 100,000.

Worked example: a GBP 3,000 raise gone wrong

Imagine a parent on GBP 99,000 receiving a GBP 3,000 raise to GBP 102,000, with two children in the scheme.

• Of the GBP 3,000, the slice above GBP 100,000 is taxed at the 60% effective rate due to the allowance taper, so GBP 2,000 yields only about GBP 800 net.
• The first GBP 1,000 below GBP 100,000 is taxed at the normal higher rate, leaving about GBP 580.
• Net pay rise: roughly GBP 1,380.
• Lost Tax-Free Childcare: up to GBP 4,000.

The family is potentially GBP 2,600 worse off despite a GBP 3,000 raise.

Clawing it back with pensions

Because eligibility is based on adjusted net income, a pension contribution can pull you back under the line. A GBP 2,000 pension contribution reduces adjusted net income from GBP 102,000 to GBP 100,000, restoring childcare eligibility and avoiding the 60% band on that slice.

Salary sacrifice achieves the same result before tax and National Insurance are applied, which is often the cleanest route.

Points to check before accepting a borderline raise

• Calculate adjusted net income, not just salary, including bonuses and benefits in kind
• Count the childcare support you would lose, per child
• Model a pension contribution to stay below GBP 100,000
• Remember the test is per parent, so one high earner alone can lose it for the household

Quick reference

• Childcare cliff edge: GBP 100,000 adjusted net income
• Tax-Free Childcare top-up: GBP 2 per GBP 8, up to GBP 2,000 per child
• 60% trap band: GBP 100,000 to GBP 125,140
• Pension contributions reduce adjusted net income

To model the trade-off, use the CalcHub take-home pay and pension calculators, then confirm the childcare rules and income limits on gov.uk.