Beware the Hidden Costs of Earning Over £100,000 as a Parent.

By Rachel Efetha, Chartered Financial Planner.

For parents earning between £100,000 and £125,140, the financial impact of crossing key thresholds can be significant. Beyond the 60% effective tax rate caused by the gradual loss of the personal allowance, parents of young children may face additional challenges. The government’s expanded childcare schemes, set to take full effect by 2025, mean the stakes are even higher for higher-earning families.

Government Childcare Support

Two main schemes help working parents with childcare costs:

Tax-Free Childcare

Working families (including single parents) can deposit up to £8,000 annually into a government childcare account, with a 25% top-up (up to £2,000 per child) provided to cover costs for children under 11.

Free Childcare Hours

In England, all 3- and 4-year-olds receive 15 free childcare hours weekly during term time. For working parents, this increases to 30 hours. From 2025, children from 9 months old will also qualify for 30 hours of free care weekly.

The Income Cliff.

However, these benefits are subject to a strict income threshold. If either parent earns over £100,000, the additional 15 free hours vanish entirely—a potential annual loss of £3,000 per child. Tax-free childcare benefits are also lost, compounding the financial strain.
From 2025, parents with two young children could lose up to 45 free hours weekly if their income exceeds the threshold—equivalent to around £9,400 annually.

A £5,000 Pay Rise Could Cost More Than It’s Worth.

For example, a parent earning £100,000 with a 1-year-old and a 3-year-old could see the following costs from a £5,000 pay rise:

• Higher Tax: £3,000 (due to the personal allowance taper)
• Lost Childcare Hours: £3,000
• Lost Tax-Free Childcare Benefits: £4,000

Total cost: over £10,000—potentially rising to £16,400 in 2025.

How to Avoid the Pitfall

To mitigate these costs, consider pension contributions to reduce your adjusted net income:

• Ask Your Employer for Contributions: Instead of a pay rise, request additional pension contributions.
• Make Personal Contributions: These can also help bring your income below £100,000.

By prioritising pensions over salary, you can retain your personal allowance, free childcare hours, and tax-free childcare benefits—making a meaningful difference to your overall finances.

How Anstee & Co. can help you with financial planning as a parent.

We are a firm of Independent Financial Advisers (IFAs). This means that the financial advice we provide to you is unbiased. Why not arrange a meeting to see how we can help you? The initial meeting is at our cost and is without obligation. Meetings can be arranged at a time and location that is convenient for you.

Our Head Office is located at:

Kettering, Northamptonshire

Additionally, our financial advisers live and make use of meeting rooms in

• Bedford, Bedfordshire
• Market Harborough, Leicestershire
• Northampton, Wellingborough and Thrapston in Northamptonshire.

Our expertise covers all aspects of financial planning including pensions, investments, and mortgages.

If you have any thoughts or comments on this article, “Beware the Hidden Costs of Earning Over £100,000 as a Parent.”, then it would be great to hear your views.

Finally, the information contained in this article is for information purposes only and does not constitute financial advice. No action should be taken based on this information alone. Anstee & Co is authorised and regulated by the Financial Conduct Authority (FCA).”