With tax rates remaining frozen since 2021, earners are finding themselves dragged into higher tax brackets as their income increases.
Of course, you’d expect that across your career your earnings would increase and cause a higher tax liability, but the much-extended threshold freeze now means that even rises in line with inflation will add further tax burden.
Additionally, if you earn over £100,000 annually and have children under the age of 11, there’s an additional bite to be taken out of your earnings – the loss of additional tax breaks for childcare.
The income tax picture for higher earners
For those earning between £50,271 and £125,140 per year, income is taxed at 40%. However, once you earn above £100,000, you also begin to lose your personal tax-free allowance (currently £12,570) at a rate of £1 lost for every £2 earned above this threshold.
In real terms:
- At £100,000 your personal allowance is £12,570 (approx £27,428 due in income tax)
- At £110,000 your personal allowance is £7,570 (approx £33,428 due in income tax)
- At £125,000 your personal allowance is £70 (approx £42,428 due in income tax)
Above £125,140, you lose your entire personal allowance and reach the Additional Rate tax band (45%). Remember that any bonuses you may receive are taxed as income, which could push you over the thresholds without realising.
Clearly, this is a sizeable bite out of your income. An income of £110,000 quickly gets knocked down to around £72,360 once you take National Insurance into consideration, and that’s without applying any pension contributions or other deductions.
When you then consider the impact of losing tax relief for childcare, shouldering the additional cost can create extra burden on your remaining funds.
Losing childcare benefits
The government runs two initiatives to support parents going back into work:
- 30 hours of free childcare per child per week
- Tax-free childcare
At present, the government’s Tax-Free Childcare scheme helps parents pay for additional hours of childcare, beyond the free 30 hours per week. Parents contribute money to the scheme, which is then topped up by the government to a maximum of £2,000 per year per child.
However, entitlement to this relief disappears as soon as either you or your partner earns above £100,000. Tax relief on childcare is calculated per couple, noting crucially that this applies regardless of marital status. However, if you each earned £99,000, you would retain it. Additionally, you lose the 30 hours of free childcare.
With the tax bands frozen, even a modest pay rise or a bonus could find you dragged over the threshold without realising.
How this could impact you
Losing your personal allowance and childcare benefits can be a very costly affair.
On average, in 2025 a full-time nursery place (50 hours a week) in England for children under the age of two cost £341.36 without any free hours applied. This is the average across the entire country – in London, the costs are much higher and can be closer to £500+ per week.
Using these figures, going over the £100,000 income threshold would mean:
- Losing £2,000 of tax relief per child.
- Losing the 30 hours of free childcare.
- An extra £9,780 in childcare costs, totalling approximately £12,970 per child on average (calculated based on 38 weeks of childcare, which is the figure the government uses to calculate allowances. Working parents may need more.).
This is in addition to the reduction in personal allowance, which could increase your costs further.
How does this work in practice?
Let’s look at an example using the current costs advertised on the website of a nursery in northwest London, which come in at £2,417 per month per child under the age of three (figures accurate as of February 2026).
- Mary and David have two children, aged three years old and 18 months. Mary earns £60,000 per year, whilst David earns £120,000.
- David’s personal allowance is tapered down to just £2,570, adding around an extra £12,400 to his income tax bill.
- Since David’s income is above the threshold, the couple loses their allowance of 30 childcare hours per child per week.
- This brings their annual nursery fees for both children up to an eye-watering sum of just over £58,000.
- They also lose their £2,000 tax-free allowance per child.
The immediate extra bite out of their expenses comes to just over £70,000 per year – that’s more than Mary’s entire salary.
This type of cost could be a significant burden to add to your household bills, just for earning an additional £20,000 over the threshold.
Using pension contributions to regain your childcare allowances
The allowances and reliefs that we have discussed are based on an individual’s ‘net relevant earnings’. The reliefs are lost if just one parent earns over £100,000.
One impactful way to reduce your income is to make extra pension contributions. This applies whether it’s a private pension or employer pension, as you will declare the contribution on your self-assessment.
A pension contribution will reduce your overall income as well as benefitting from additional tax relief. In turn, this will lower your net relevant earnings. If your contribution takes you back below the threshold, you could once again fully benefit from the full personal tax allowance as well as the two childcare benefits.
If David made additional pension contributions of £20,000 across the year (£12,000 net contribution and £8,000 in tax relief), taking him back down to £100,000, the picture would be quite different:
- David’s personal allowance would be fully intact.
- The 30 childcare hours per child would bring their nursery costs down to around £10,380 across both children.
- The couple would benefit from an additional £4,000 towards these costs, making their own cost towards childcare only around £6,380.
The comparison is quite significant. For only the ‘cost’ of £12,000, you can save yourself around £64,020, excluding the tax relief you’d receive on the pension contribution.
There is also the additional benefit of accumulating funds in your pension at a faster rate than you would have done otherwise through only your workplace pension. With the benefit of time on your side, the extra amounts you contribute now will enjoy a long period of compounding. This should place your retirement savings in excellent stead.
Whilst increasing your pension may have knock-on effects for your future inheritance tax liability, if you are of working and parental age with young children, chances are you have plenty of time to work towards mitigating that further down the line.
What next?
The best time to plan for this is before it happens to you. If your income is approaching the £100,000 mark, it’s time to start planning ahead.
This is also a great moment to review your overall pension provisions and assess your plans for retirement. This may feel a long way off at this stage, but the earlier you begin contributing the better. A little forward-thinking now can make all the difference in the long run.
If you’re already in this income range or not that far away, then this piece of planning has a real impact on total cost to the family.
If you would like to book in some time to speak with a wealth manager, please email wealthmanagement@tidewayinvestment.co.uk or fill in the form below to book a free guidance session.
