How to Keep Your Childcare Benefits if You Earn Over £100k a Year

If you earn over £100,000 a year, you may lose your eligibility for Tax-Free Childcare and the 30 hours of free childcare. However, there are strategies available to help reduce your taxable income and retain access to these valuable benefits. Here’s how you can make sure you keep your additional childcare benefits, even with a higher income.

 1. Make Pension Contributions to Reduce Taxable Income

One of the most effective ways to reduce your income and retain childcare benefits is by contributing to your pension. Pension contributions lower your adjusted net income, which is the key figure used to determine eligibility for Tax-Free Childcare and the 30 hours of free childcare.

How it works:

• If your income is £105,000, you can make pension contributions to reduce your taxable income.
• By contributing £5,000 (Gross) to your pension, you can bring your income back to £100,000 or below, potentially making you eligible for these benefits.

Tip: Speak to an adviser to ensure you’re contributing the right amount for maximum tax relief. The relief is not automatic in most cases and a claim needs to be made. You can make the claim yourself or use a specialist firm like TaxQube. 

 2. Utilise Salary Sacrifice Schemes

If your employer offers salary sacrifice schemes, you can reduce your gross salary in exchange for non-cash benefits. These schemes can include pension contributions, or other benefits, which reduce your taxable income. Your employer can increase their share of the contributions and you get even more into your pension scheme due to “additional employer contributions”.

How salary sacrifice works:

• Your salary is reduced, but you receive contributions to your pension.
• This lowers your taxable income, which could keep you below the £100,000 threshold for Tax-Free Childcare eligibility.

 3. Claim Business Expenses (For the Self-Employed)

If you’re self-employed, you may be able to claim business expenses that reduce your taxable profits, helping you to lower your income and keep your childcare benefits.

Examples of business expenses:

• Office equipment
• Travel and accommodation costs
• Business-related subscriptions
• A portion of your home office costs

By reducing your taxable income through allowable business expenses, you can stay below the £100,000 threshold and retain access to additional childcare benefits.

 4. Make Charitable Donations Through Gift Aid

Donating to charity through Gift Aid can lower your adjusted net income, making it easier to stay eligible for Tax-Free Childcare and 30 free hours of childcare.

How Gift Aid works:

• Donations made through Gift Aid reduce your taxable income, which could bring you below the £100,000 threshold.
• This strategy allows you to support causes you care about while reducing your income for tax purposes.

 5. Income Shifting Between Partners

If you are married or in a civil partnership, consider shifting some of your income to your partner. This strategy can help reduce your taxable income and ensure eligibility for Tax-Free Childcare.

How income shifting works:

• If your partner earns less than £100,000, you could shift income-generating assets, such as dividends or investments, to them.
• This can help reduce your income while keeping your household eligible for childcare benefits.

 Key Takeaways

• Pension Contributions: Contribute to your pension to reduce your taxable income below £100,000.
• Salary Sacrifice: Take advantage of salary sacrifice schemes to lower your taxable income.
• Business Expenses: Claim business expenses if you’re self-employed to reduce your income.
• Charitable Donations: Make Gift Aid donations to lower your adjusted net income.
• Income Shifting: Shift income to your partner to stay below the threshold.

 FAQ: Retaining Childcare Benefits While Earning Over £100k

1. What happens if my income exceeds £100,000 for just one year?

If your adjusted net income exceeds £100,000 for a single tax year, you may lose eligibility for Tax-Free Childcare and 30 hours of free childcare for that year. However, if your income drops below £100,000 in subsequent years, you can reapply for these benefits.

2. What is adjusted net income, and how is it calculated?

Adjusted net income is your total taxable income minus certain deductions, such as:

• Pension contributions
• Gift Aid donations
• Qualifying allowances like job expenses

This figure is used to determine eligibility for childcare benefits. Here is a link at gov.uk if you wish to understand this further.

3. Can bonuses or overtime impact my childcare benefits?

Yes, bonuses and overtime can push your income above the £100,000 threshold. To mitigate this, consider strategies like making additional pension contributions in the same tax year to reduce your adjusted net income.

4. Do both parents need to earn below £100,000 to qualify for childcare benefits?

Yes, to qualify for Tax-Free Childcare or the 30 hours of free childcare, neither parent in a household can have an adjusted net income above £100,000. If one parent earns over the limit, the household becomes ineligible.

5. Is the £100,000 limit likely to change in the future?

The £100,000 threshold is a fixed figure, but tax rules and limits can change. It’s advisable to stay updated on government announcements or consult a tax professional for the latest information.

6. Can I claim business expenses as an employee to lower my income?

Employees can only claim specific allowable expenses, such as mileage or necessary tools, but these typically won’t significantly impact your adjusted net income. Self-employed individuals have broader options for deducting business expenses.

7. How quickly do these strategies affect eligibility?

Adjustments to your taxable income, such as pension contributions or salary sacrifices, are applied within the same tax year. If they reduce your adjusted net income below £100,000, your childcare benefit eligibility can be reassessed.

If you have more specific questions about your circumstances, consult a tax expert like TaxQube or financial adviser to guide you through retaining your childcare benefits.

Appoint TaxQube to manage your taxes

Being a regulated firm of specialist tax accountants, we are able to help you in submitting your tax reports to HMRC with the pension tax relief claims. We look after a large number of professionals from various industries and able to deal with pension tax claims and other complex transactions if applicable.

Unlike other firms, we do not charge anything from your tax savings which could be in thousands, you keep 100% of it. We help you maximise your tax savings as we have seen cases where people miss out by simply doing it themselves or by not using a tax specialist advisory firm like TaxQube.

We only charge a monthly retainer fee which gives you access to accredited tax advisers to help you manage your taxes and advise that you need to optimise your taxes. Contact us for a free of charge initial consultation.