The £105,000 salary that's worth less than £99,999

In 2026/27, an England family with two children under five loses £17,680 a year of childcare support the moment one parent's adjusted net income passes £100,000. Not tapered away. Gone, on the first pound over.

That is big enough to break the rule you have assumed your whole working life, which is that more gross pay means more money. For the family below, a salary of £105,000 leaves them £15,779 worse off this year than a salary of £99,999. Taking the money as cash does not catch up with giving it back to a pension until £140,473.

I build the calculators on this site, and every figure here comes out of the same code that runs the salary calculator. I have not typed one of them in by hand, which is the point. The assumptions are all in Show your working at the end, so you can check the arithmetic rather than take my word for it.

The short version

Two separate schemes stop at £100,000 of adjusted net income, and both stop as a cliff rather than a taper:

Free childcare hours. Working parents in England get 30 funded hours a week for 38 weeks a year, from 9 months until the child starts school. Above £100,000 the working-parent portion stops. Three and four year olds keep the universal 15 hours, which have no income test. Younger children keep nothing.

Tax-Free Childcare. The government adds £2 for every £8 you pay into a childcare account, capped at £2,000 a year per child. Above £100,000 it stops entirely.

The same test has a floor as well as a ceiling. Each parent has to expect to earn at least the minimum wage for 16 hours a week, which is £10,574.72 a year at the 2026/27 rate for the over-21s. A household where one parent is not working is outside both schemes whatever the other earns, unless that parent gets carer's allowance, incapacity benefit or contribution-based ESA. That is a different problem from the one this article is about, and a pension contribution does not solve it: it moves the income the test reads, but it cannot create earnings.

Adjusted net income is your income after pension contributions and gift aid. (Almost nobody knows their adjusted net income. That is most of the problem.) It is also the whole mechanism of this article: a pension contribution reduces the number the test reads, so it can put a family back under £100,000 without them changing jobs.

Meet the family

Two working parents in London. One earns £45,000, comfortably below the threshold and not the reason anything changes. The other is the one whose salary moves through this article. They have two children: one aged 10 months, one aged three.

They use 30 funded hours a week for each child, and their nursery charges £8 an hour. That rate is deliberately below the London market: the Coram Childcare Survey puts a part-time place for an under-two in London at closer to £8.40 an hour for families who are not eligible for the entitlements, and higher again in inner London. Using a lower rate makes the numbers here smaller than the family would really face.

What it actually costs you

Below £100,000 this family gets £18,240 of funded hours and £4,000 of Tax-Free Childcare, so £22,240 a year in total. Above it they get £4,560, which is the three year old's universal hours and nothing else.

The three year old loses 15 hours rather than 30 because the universal 15 survive. The 10 month old loses all 30, because there is no universal entitlement below three. The younger the child, the more the cliff takes.

So what does it cost?

Take-home pay plus the annual value of the childcare support the family keeps. Pension contributions are shown separately, because they are real money but not money the family can spend this year, and this year's cashflow is the question.

A pay rise from £99,999 to £105,000 is £5,001 of extra gross pay. It leaves the family £15,779 worse off, an effective marginal rate of 415.53%. A larger rise, to £111,000, still leaves them £13,499 worse off, at 222.71%.

Sacrificing the rise into a pension puts the family back exactly where they started on cashflow, and leaves £5,001 or £11,001 in the pension that would otherwise not be there. That is what the last two rows show: identical resources to £99,999, plus the pension.

Where taking the cash finally wins

Cash has to make up £17,680 of lost childcare out of pay taxed at 62% between £100,000 and £125,140, where the personal allowance tapers away, and 47% above that. You can probably guess how that goes. It takes ages.

For this family, taking the money as cash does not produce as much in today's resources as sacrificing back to £99,999 until a gross salary of £140,473. That is £40,473 above the threshold. At every salary in between, sacrifice wins on this year's cashflow and puts the difference into a pension as well.

Why this catches more people every year

The £100,000 threshold has not moved since 2017, when both schemes started. Pay has. That gap is the whole of fiscal drag, and it is the reason this article gets more relevant every year rather than less. Nobody has to change the rule for more families to be caught by it. They just have to leave it alone.

Income tax thresholds are frozen until April 2031, and the personal allowance taper sits at the same £100,000. So two things are being dragged at once. The difference is what happens when you cross. The taper takes your allowance gradually, a pound of allowance for every two pounds earned. The childcare threshold takes the working-parent hours in one go, on the first pound. Fiscal drag usually pushes people up a ramp. Here it pushes them off an edge.

(If your pay rise this year roughly matched inflation, you did not get richer. You got closer to the edge.)

Everything here describes the rules as they stand for 2026/27. The Budget on 28 October 2026 could change them, and I will update this article if it does.

When this stops being true

Older children. Once both children are over three the universal hours cover more of the loss, and once they are at school the funded hours stop mattering at all. The cliff shrinks as the children age, and disappears.

Fewer hours. A family using fewer funded hours loses less. The crossover moves down accordingly.

A cheaper nursery. Outside London the hourly rate is lower, so the hours are worth less and the cliff is smaller. It does not disappear: Tax-Free Childcare is worth the same everywhere.

Employer National Insurance. An employer sacrificing salary saves 15% employer NIC, and some pass it back. I have left that out, which makes sacrifice look worse here than it often is. I would rather understate it than assume an employer you may not have.

Student loans. I have not modelled them. A borrower repaying 9% above the threshold keeps less of every pay rise, which pushes the crossover further right.

The pension itself. Money in a pension is locked until at least 57 and taxed on the way out. The comparison here is deliberately about this year's cashflow only, which is the comparison that decides whether a pay rise makes a family better or worse off right now.

England only, I am afraid

Free childcare hours are devolved, so everything above describes the England scheme and only the England scheme. Scotland, Wales and Northern Ireland run their own, and they do not work the same way. Scotland funds 1,140 hours a year for eligible children regardless of household income, so the hours half of this cliff does not exist there at all.

Tax-Free Childcare is UK-wide, so the £100,000 test on that half applies wherever you live. So does the personal allowance taper.

Show your working

Follow these and you will get the same numbers.

The high income child benefit charge is left out because it is fully clawed back by £80,000, so it does not move anything between £99,999 and the salaries above it. The partner's take-home is not counted in today's resources either: it is the same in every scenario, so including it would shift each row by the same amount and make the comparison harder to read.

What I take from this

For the family modelled here, every pound of gross pay between £100,000 and £140,473 leaves them worse off on this year's cashflow than sacrificing it into a pension. That is a range of nearly £40,473 in which the usual relationship between gross pay and money in the bank runs backwards.

It stops holding when the children get older, when the family uses fewer funded hours, when childcare is cheaper, or above the crossover. It also stops holding if you care about total wealth rather than this year's cashflow, because the sacrificed money is still there, in a pension. This is what the rules do, not what you should do about them. Your situation has details in it that this article does not know about.

One thing follows regardless. Check your adjusted net income, not your gross. They are not the same number, the £100,000 test reads the first one, and most people only ever look at the second.