Smart Financial Planning for Childcare Costs: Why High-Income Individuals Shouldn’t Miss Out on Support

If you're a parent with an adjusted net income over £100,000, you might think you've "phased out" of childcare support. But here's the truth: from September 2025, by not taking steps to reduce your adjusted net income, you could be walking away from over £20,000 per year if you have two kids in full-time childcare.

Executive Summary

• Overview of September 2025 reforms (30 free hours from 9 months).
• The critical income thresholds that unlock support.
• Financial planning strategies to retain eligibility and build long-term wealth.

Background: The 2025 Childcare Reform

Policy Update: From September 2025, families can claim:

• 30 hours/week of free childcare from 9 months until they reach school age for eligible working families.
• Tax-Free Childcare: Up to £2,000/year per child for qualifying families.

Eligibility Criteria:

• At least £2,380/3 months (16 hrs/week at minimum wage) - there are different limits, depending on age of claimant linked to the national minimum wage and which country you are a resident in.
• Adjusted net income of less than £100,000 per year.
• Working parents only: both parents must be working if living together; only one parent needs to work if you're a single parent or not living together.
• Must use a registered childcare provider.
• Must reconfirm eligibility every 3 months.

Childcare Cost Comparison: Claiming vs. Not Claiming

Example Assumptions:

• 2 children in full-time nursery (Cedar Park Day Nursery Twyford rates used as an example).
• Without help: £2,135.25/month per child.
• With help: £1,402.99/month per child + up to £2,000/year via TFC.

Monthly Cost Breakdown (2 Kids):

→ Monthly savings: £1,797.85
→ Annual savings: £21,574.20

The £100,000.00 Cliff Edge: When Help Disappears

• Once a parent has an adjusted net income in excess of £100,000 eligibility for both 30 free hours and TFC disappears entirely.
• Due to loss of personal allowance where the adjusted net income is in excess of £100,000, the effective tax rate can spike to over 60% on income between £100,000–£125,140

So, to get £21,574.20 in additional net income if your adjusted net income is above £100,000, you need to earn £147,821.13

Pension Strategy: Compound the Savings

You can regain eligibility for 30 free hours and Tax-Free Childcare by making pension contributions that reduce your adjusted net income below £100,000. It’s a tax-efficient way to unlock childcare support while building long-term wealth for you and your family in retirement.

Pension Contribution Scenarios (5.9% annual growth, adjusting net income over 4 years to stay under £100,000, then left untouched for 26 years).

The Financial Conduct Authority sets maximum growth rates that can be used in projections. These rates, after allowing for the effects of inflation, are -0.10%, 2.90%, and 5.90% each year.

These figures are examples only and they are not guaranteed - they are not minimum and maximum amounts. What you get back depends on how your investment grows and the tax treatment of the investment. You could get back more or less than this.

Important Considerations When reviewing an individual adjusted net income for the purpose of childcare support

Pension Contributions & Annual Allowance
In the tax year (2025/26), the standard Annual Allowance is £60,000 per year. This covers the amount that you can pay into your pension and receive tax relief on personally, or   the amount from any third parties including your employer. This may be reduced if you have previously flexibly accessed benefits, or if you are a high-income individual. If you exceed your Annual Allowance, you may be able to use any unused allowances from the three previous tax years, provided you were a member of a registered UK pension scheme in those tax years (even if you were a deferred or pensioner member).

The maximum amount you can personally contribute and receive tax relief on is restricted to the higher of £3,600 or 100% of your relevant UK earnings. This would be limited to your available annual allowance plus carry forward.

Charitable Donations
Gift Aid donations reduce your adjusted net income and may help bring you below key thresholds. Keep records of all donations for tax return purposes.

Mortgage & Lending Impact
Lowering your taxable income through pension contributions can reduce your borrowing capacity for a mortgage, especially if lenders use net income or affordability models based on take-home pay.

Workplace Benefits
Some benefits—such as Death in Service cover, life insurance multiples, or employer sick pay—may be based on your contractual salary rather than post-contribution income. However, it’s worth checking how your scheme defines pensionable earnings.

Student Loan Repayments
Reducing your adjusted net income may lower your student loan repayments, depending on your repayment plan.

Timing Matters
Income adjustments (e.g. pension contributions or donations) must be made within the relevant tax year to be counted. Planning ahead is key.

Every situation is unique. I offer a no-obligation health check tailored to your finances. Get in touch to see what works best for you.

During this check, we’ll consider:

• Your current income and tax position
• Childcare costs and available support
• How different planning scenarios impact your adjusted net income
• Steps you can take to optimise your position

Get in Touch Today!

Goodall-Smith Wealth Management Team

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.

Although the content of the article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.