The £100k Trap: Why Earning More Can Leave UK Families Worse Off
There was a time when earning £100,000 a year carried a certain expectation of comfort: a bit more breathing room, fewer cautious glances at the banking app, and perhaps the occasional treat that didn’t require cross-referencing with the family budget.
For households in the £100k–130k range, the uncomfortable reality is that earning more can, surprisingly, leave them worse off.
The Real Cost of a Modern £100k Salary
Before we reach tax, it’s worth grounding the reality of what £100,000 actually pays for today.
Childcare is now one of the largest household expenses. According to Coram/DayNurseries (2025), the average full-time (50 hours/week) nursery place for an under-2 costs:
£319.24 per week in inner London
£274.48 per week in Outer London
£238.95 per week across England
For a family with two young children, this regularly amounts to £2,000–2,400 per month.
Layer on rent or a mortgage (typically £2,200–3,000 for a family home in much of London and the South East), rising food costs, commuting expenses and utilities, and the idea that a six-figure salary guarantees comfort looks increasingly outdated.
Only once these pressures are in place do we arrive at the tax system and this is where the picture becomes even more challenging.
The UK personal allowance (£12,570) is withdrawn at:
£1 for every £2 earned above £100,000.
That means income between £100,000 and £125,140 is effectively taxed at 60%
Example: £10,000 Bonus at £100,000 Salary
40% tax on £10,000 = £4,000
Loss of £5,000 personal allowance = £2,000 tax
Total tax = £6,000
Take-home = £4,000
Effective rate = 60%
For many households, this is where earning more starts to feel futile.
But crossing £100,000 causes a second, much bigger blow: the loss of childcare support.
The Childcare Cliff Edge
The £100,000 threshold isn’t just a tax anomaly, it’s also the trigger point for losing access to two major childcare support schemes.
Tax-Free Childcare
HMRC is explicit: if either partner has adjusted income over £100,000, the support stops.
Tax-Free Childcare provides a 20% top-up on childcare spending, worth up to £2,000 per child per year (or £4,000 for disabled children).
For a household with two young children, that’s £4,000 of support lost immediately.
Funded Hours for Working Parents
The expanded working-parent childcare offer (rolling out 2024–2025) requires each working parent to earn below £100,000.
Losing these hours means losing:
30 hours per week
38 weeks per year
valued around £8.50 per hour (London settings)
That’s £9,690 per child or roughly £19,380 per year for two children.
These “30 hours free” aren’t remotely free if your income ticks even slightly above the line.
Total Childcare Support Lost
Add it together:
Tax-free childcare: £4,000
30 hours per week funded hours: £19,380
Total: £23,380 lost
And it all disappears the moment one parent goes from £100,000 to £100,001.
…. savage.
Why the System Works This Way
Independent taxation was introduced in April 1990 by the Conservative government under Prime Minister Margaret Thatcher, following direction from former Chancellor Nigel Lawson and implemented by his successor John Major. It modernised the system by taxing adults as individuals rather than as households, a progressive shift at the time, replacing rules that treated a married woman’s income as her husband’s.
But it was built for a world where:
single earner families were common
childcare was far cheaper
and one salary could realistically support a household
Fast forward to 2025:
two full-time earners are the norm,
childcare costs have risen faster than wages,
and the £100,000 threshold has been frozen since 2010.
This is what's known as ‘fiscal drag,’ or more plainly, a stealth tax, quietly pushing more families into a trap they were never meant to fall into.
(Illustrative example):
Consider two families:
Family A: two parents earning £90k + £90k
Family B: one parent earning £120k, the other £20k
Family B earns £40,000 less, yet ends up worse off, all because one parent crosses the £100k line.
Step 1 - Income Tax:
Family A avoids the 60% marginal band.
Family B triggers it and loses most of the personal allowance.
Step 2 - Childcare Support:
Family A keeps £23,380 of childcare support.
Family B loses £23,380 of childcare support.
Combined Effect:
Family A earns more, pays less tax and keeps support.
Family B earns less, pays more tax, and loses the support.
Reform we’d like to see:
Raise the £100k threshold: If it had risen with inflation, it would now be £135k–£145k. Frozen thresholds act as stealth tax rises.
Assess childcare support on household income (the international norm)…
Examples include:
Canada: family based child care benefit
Australia: child care subsidy based on combined family income
New Zealand: childcare subsidy based on household income and size
Germany: childcare support tied to household income
France: nursery fees and allowances based on household income
Ireland: national Childcare Scheme uses household income
Denmark: childcare fees capped by household income
Sweden: universal childcare with fees linked to household income
Norway: childcare capped and means-tested on household income
Netherlands: childcare capped and means-tested on household income
Practical Planning Points
1. Understand what counts as “adjusted net income”
People often only focus on salary, but HMRC calculates the £100k threshold using adjusted net income, which includes:
salary
bonuses
taxable benefits (e.g. private medial cover)
rental profits
dividends
savings income
And deducts:
gross pension contributions
gift aid donations
salary sacrifice arrangements
2. Pension contributions & Salary sacrifice
The simplest and currently most effective way to reduce adjusted income below the £100k threshold is through pension contributions, either:
personal contributions
salary sacrifice
Appreciate that this is less money in your pocket now and more later…. but if you’re nearing the £100k mark, a small increase to pension could save you lot more than you lose.
The Budget confirmed that from April 2029, the National Insurance benefit of salary sacrifice will be capped at £2,000 per employee per year.
Crucially, however:
the income tax relief stays,
the reduction in adjusted net income stays, and
the ability to keep personal allowance and childcare support stays.
NIC savings shrink but the core value of using pensions to get below £100k remains.
Playbook: between now and 2029:
This is the last three-year window where full NIC savings still apply.
If your income fluctuates around £100k–£130k, the most efficient moves now are:
a) Maximise pension salary sacrifice while NI relief is still uncapped
Every £1 sacrificed:
reduces adjusted net income
helps restore personal allowance
protects access to childcare support (worth up to £23,380)
avoids the 60% marginal tax zone
AND — until April 2029 — saves full employee + employer NICs
This is the strongest savings window we will have for years.
b) Plan bonus sacrifice proactively
Once bonuses hit payroll, it’s too late.
Early instruction to payroll gives maximum benefit.
Playbook: After 2029:
Salary sacrifice remains worthwhile, but the reason changes.
a) You still want to get below £100,000
Even if NICs are due, getting adjusted income below £100k still:
avoids the 60% marginal band
preserves up to £12,570 of personal allowance
protects up to £23,380 of childcare support
improves net take-home compared to doing nothing
The NIC saving becomes smaller, but the total saving is still large.
b) Use a blend of tools instead of relying on NI savings
From 2029 onward:
salary sacrifice up to the £2k NIC cap
then top up with personal pension contributions to stay under £100k
use Gift Aid strategically (also reduces adjusted net income)
time bonuses or deferrable income where possible
optimise benefit structures (e.g., electric car schemes) where they reduce adjusted income
c) Do not assume “salary sacrifice is dead”
It simply becomes a threshold-management tool instead of a NIC-arbitrage tool.
For anyone with childcare costs or close to the 60% band, the value after 2029 remains very significant.