The number of parents deliberately holding their income below the £100,000 childcare cliff-edge threshold could reach nearly 12,000 by the end of this parliament, tax researchers have warned, as a separate loophole allows some higher-earning families to claim free childcare they are not entitled to. The Centre for the Analysis of Taxation (Centax) has published analysis laying out both the scale of the problem and a menu of options for the government to address it.
The £100,000 Childcare Cliff-Edge in Numbers
Centax estimates that close to 12,000 parents could be deliberately keeping their income below £100,000 to retain access to 30 hours per week of free childcare for under-fives. That would represent an increase of nearly 11,000 from 2022, when government data showed around 1,100 parents of three and four-year-olds doing the same thing.
The free childcare scheme was introduced by then-Chancellor Jeremy Hunt in March 2023. It set a threshold of £100,000 per parent in adjusted net income: families in which neither parent exceeds that figure qualify for 30 hours of free childcare per week. As Porta Partners notes, the limit is assessed on each parent individually rather than on the household’s combined earnings, which means a couple earning £90,000 each would both qualify, while a single earner on £101,000 would not.
Labour adopted the policy as part of its drive to get more parents into the workforce. The scheme now costs the government nearly £5 billion a year. The government is currently reviewing the programme’s performance.
On top of the income-management behaviour, Centax found that one third of parents earning between £100,000 and £120,000 had claimed and received free childcare through a loophole. Under present rules, parents self-report their expected adjusted net income, meaning those whose actual earnings exceed the threshold can declare a projected figure below £100,000 and pass the eligibility check. Centax argues the system should be based on actual rather than projected income.
What Reform Could Cost, and What It Could Save
Researchers set out several options the government could consider. Raising the income threshold to £111,000 could be done at, in Centax’s words, “no additional fiscal cost”. Removing the £100,000 threshold for free childcare entitlement altogether would cost around £640 million in 2030.
A middle path also exists. According to BM Magazine‘s coverage of the Centax report, restricting families above the threshold to 15 hours of free childcare rather than withdrawing entitlement entirely would cost £210 million by 2030. That is roughly a third of the cost of full removal and could blunt the cliff-edge effect without eliminating the threshold.
Arun Advani, Centax director and University of Warwick economics professor, said: ‘Our analysis shows the childcare cliff-edge stands to grow dramatically by the end of this parliament, but there are solutions available to the government, including the opportunity to prevent parents whose incomes exceed the threshold from claiming free childcare.’ His colleague at Centax, Jack Pepin-Hall, called for the system to be changed to be ‘fairer’ for all higher earners.
A Trap That Predates Free Childcare
The free childcare entitlement is only the latest pressure point at the £100,000 income level. Workers in that salary band already face a 60 per cent effective marginal tax rate, caused by the tapering of the £12,570 tax-free personal allowance. For every £2 earned above £100,000, the personal allowance falls by £1, and the allowance is fully withdrawn by £125,140. Those with student loans face further deductions on top.
The childcare cliff-edge compounds those disincentives sharply. Economists have noted that the combined burden has partly dampened wage growth, as workers in this band have limited financial incentive to push for higher salaries. A parent who earns £101,000 can lose access to childcare support worth thousands of pounds annually, pay a higher effective tax rate than someone earning £130,000, and service a student loan, all from a single pound of extra earnings.
The government’s review of the Hunt-era childcare scheme will have to weigh those distortions against the cost of reform. With Centax projecting that the number of parents managing their income around the threshold could rise by roughly tenfold before the next election, ministers face mounting pressure to act before the GOV.UK childcare system’s structural flaws become considerably harder to fix.
