Beating the £100,000 Threshold

The £100,000 adjusted net income threshold is a harsh threshold, particularly for working parents reliant on childcare. Once adjusted net income exceeds £100,000, the personal allowance is gradually eroded, resulting in a high marginal rate of tax, and valuable childcare support is lost. However, there is action which taxpayers can take to preserve their personal allowance and keep their childcare.

Erosion of the personal allowance

The personal allowance is reduced by £1 for every £2 by which adjusted net income exceeds £100,000 until it is lost entirely once adjusted net income reaches £125,140. The threshold has been unchanged since it was introduced in April 2010, pulling more taxpayers into it’s realms each year.

Tax-Free Childcare

The Government’s tax-free childcare system allows eligible parents to open an account and receive a tax-free top-up of £2 for every £8 that they deposit, up to a maximum of £2,000 per child per year (£4,000 where the child is disabled). The money in the account can be used to pay for childcare as long as the childcare provider is signed up to the account. For a family with two children using childcare, the top up reduced their childcare costs by £4,000 a year.

However, this is not available if the applicant or their partner has or are expected to have adjusted net income of more than £100,000 for the tax year. Here the £100,000 threshold works as a cliff edge. Once the threshold is reached, the tax free top up is lost entirely.

Free Childcare

The Government’s free childcare for working parents provides up to 30 hours a week of free childcare for children aged nine months to four years for 38 weeks of the year. For parents of young children, this is a very valuable benefit. However, it is only available where the parent’s income (and that of their partner if they have one) is not more than £100,000 a year.

Calculating Adjusting Net Income

Adjusted net income is total taxable income before any personal allowances, less certain reliefs including:

• Trading losses
• Charitable donations through Gift Aid
• Pension contributions

Preserving the Personal Allowance

Where the personal allowance is lost in full or in part, reducing adjusted net income may preserve some or all of the allowance. If adjusted net income is between £100,000 and £125,140, a reduced personal allowance is available. However, where adjusted net income is £100,000 or less the allowance is available in full.

Preserving Tax-Free Childcare and Free Childcare

Reducing income to below £100,000 will restore eligibility for the tax free childcare top up and for the Government’s free childcare. Couples must both have adjusted income of £100,000 or less to qualify.

There are various ways of reducing adjusted net income.

Option 1: Make Pension Contributions

Making pension contributions is a valuable way to reduce adjusted net income. A person can make tax relieved pension contributions of up to 100% of earnings (or £3,600 gross if higher_ and the annual allowance cap.

The annual allowance is set at £60,000 for 2026/27, but is reduced where both threshold income exceeds £200,000 and adjusted net income exceeds £260,000 by £2 for every £1 by which adjusted net income exceeds £260,000 until the minimum amount of the allowance, set at £10,000 for 2026/27, is reached. Once the current year’s allowance has been used, unused allowances from the previous three tax years can be used. Once the pension has been flexibly accessed, the annual allowance is reduced to £10,000.

Option 2: Salary Sacrifice

Under a salary sacrifice arrangement an employee swaps cash pay for a non-cash benefit. Where the benefit is one of a handful of benefits to which the alternative valuation rules do not apply, this can be worthwhile. Options here include pension contributions and advice, and cycle to work schemes. However, it should be noted that from 6 April 2029, the NIC savings will only apply to the first £2,000 of salary sacrificed in exchange for employer contributions.

Where the alternative valuation rules apply, the employee is taxed on the higher of the salary given up and the cash equivalent of the benefit. Consequently, this strategy only works for exempt benefits outside the scope of the alternative valuation rules.

Option 3: Donations to Charity

As with the pension contributions, making a donation under Gift Aid reduce adjusted net income. This can be a good option, particularly where the conation secures eligibility to tax free childcare.

Option 4: Reducing Hours

Once adjusted net income goes over £100,000 it maybe that extra time is preferable to extra money. The higher marginal rate of tax between £100,000 and £125,140 and the loss of childcare help may mean that a person can reduce their hours without being much worse off.

Couples may find that they are better off if they both work part time than if one partner works full time while the other stays at home. A couple where both earn £55,000 will benefit from the childcare help and keep their full personal allowances. However, if one partner stays at home and the other earns £110,000 although their combined income is the same, they will pay more tax and not benefit from the childcare help.