Did you know that earning just £1 extra could lead to £1,000s lost in free childcare? It might sound extreme, but the UK’s tax system makes this a possibility.
Below, our financial planners explain the key changes to UK childcare funding in September 2025, how these could affect financial planning for new parents, and their options for avoiding the “funding trap”.
England has a complex history with childcare funding. In the New Labour Years (1997-2010), a big change was the introduction of free part-time nursery education places for all four-year-olds. This was later extended to all three-year-olds, and the Coalition government (2010-15) widened the entitlement to 15 hours a week.
From 2017, eligible “working families” could access up to 30 hours of free childcare a week for their three and four-year-olds. In April 2024, parents could get up to 15 hours of free childcare for their two-year-old. Later, in September, this was made available to eligible children between nine months and two years old.
More recently, in September 2025, all eligible families with children aged nine months to three years will have access to 30 hours a week.
The new free childcare scheme is only available under specific conditions:
This last part is what could catch out certain families. If your earnings are just slightly more than £100,000 for the tax year, you could lose out completely on 30 hours of free childcare per week.
Given that a 30-hour week of childcare could otherwise cost you between £65 - £200, this could represent up to £10,400 in fees.
It’s a bizarre system, and it is arguably unfair given that the £100k “cliff edge” applies on an individual basis (not to a household). For instance, two parents earning £60,000 each (£120,000 in total income) are entitled to free childcare, but one parent earning £120,000 is not.
The really tough part of this is that parents can be caught out without realising. For instance, you get a £5,000 pay rise (or a one-off bonus/sales commission), taking you over the £100,000 limit. Suddenly, you lose the full 30-hour entitlement.
The last thing you want is to work overtime or earn Restricted Stock Units (RSUs) and unwittingly disqualify your family for a whole term. Indeed, those at the highest risk of getting caught out are those with variable income, or households with one main earner.
Fortunately, there are practical steps you can take to avoid this trap.
One option is to pay more into your pension. For instance, if your salary is £102,000, you could put £2,000 straight into your workplace/private scheme and bring your adjusted net income back to the £100,000 threshold.
The other benefit is that this approach “reinstates” your tax-free Personal Allowance (usually £12,570), which is tapered by £1 for every £2 earned over £100,000 - leading to an effective tax rate of 60% on income between £100,000 and £125,140.
A similar approach is to use salary sacrifice (e.g. electric vehicles, cycle-to-work etc.) to lower your taxable pay and bring your earnings under £100,000. You could also consider asking your employer to defer a bonus to the next tax year.
Another idea is to make Gift Aid donations to lower your net adjusted income. Or, for certain households where both parents work, it could be prudent to explore “creative” ideas for your employment (e.g. each person going to a 3 or 4-day working week, to keep more “after tax” income for the household and maximise free childcare entitlement).
With the expansion of free childcare from September 2025, many families stand to gain thousands in savings.
Yet the risk of losing this benefit due to the £100k threshold means that wealth planning, tax efficiency and income structuring are no longer just concerns for “high net worth” individuals. They matter to middle- and upper-middle-income households too.
A financial planner can help you navigate these sorts of rules with greater confidence and efficiency. For example, increasing pension contributions not only protects your childcare entitlement but also boosts your long-term retirement savings and reinstates your full personal allowance - effectively delivering a “triple win.”
If you’d like to ensure you’re taking the right steps to protect your family wealth and safeguard your financial future, please get in touch.
Your capital is at risk. Investments can go down as well as up, and you may not get back the amount you originally invested. Past performance is not indicative of future results. Diversification does not guarantee profits or fully protect against losses. Tax treatment depends on individual circumstances and may change in the future. This content is for information only and does not constitute personal financial advice. Readers should seek independent financial advice before making any investment decisions.
Castlegate Financial Management Limited is registered in England No. 2077374. Registered Office: 8 Castlegate, Grantham, Lincolnshire. NG31 6SE. Authorised and Regulated by the Financial Conduct Authority. FCA No. 169777.
