How UK parents can keep their Adjusted Net Income under £100,000 and retain free childcare entitlements

If you're reading this, you're probably concerned that potential higher earnings could take away your right to free childcare.

In the UK, families are entitled to up to 30 hours of free childcare per week for children aged 3 and 4. However, this entitlement is means-tested when it comes to higher earners. If either parent earns over £100,000 in adjusted net income, the family loses eligibility for these valuable childcare hours.

This threshold can catch some parents by surprise - especially those who receive bonuses, dividends, or income from multiple sources. Fortunately, with strategic financial planning, you can take steps to reduce you adjusted net income, stay below the threshold, and maintain access to free childcare.

This article outlines what adjusted net income is, the implications of crossing the £100,000 line, and practical methods to help parents manage their income to retain this crucial benefit.

What Is Adjusted Net Income?

Adjusted net income (ANI) is not the same as gross salary. It is essentially your total taxable income after certain deductions have been made, including:

• Pension contributions

• Gift Aid donations

• Trading losses

• Certain tax reliefs (e.g., from investments in qualifying schemes)

• Salary Sacrifice benefits such as pension contributions or a company car

  
  

It includes:

• Salary and wages

• Bonuses and commissions

• Rental income

• Savings interest

• Dividends

• Benefits-in-kind (such as a company car)

• Income from abroad

  
  

Understanding what counts toward your ANI is crucial when trying to stay under the £100,000 cap.

Don't get the term 'net' confused with post-tax earnings.

Why £100,000 Is a Key Threshold

Once your adjusted net income exceeds £100,000, several changes kick in:

1. Loss of Free Childcare: You become ineligible for the 30 hours of free childcare for your 3–4-year-old.

2. Tapering of Personal Allowance: You begin to lose your tax-free personal allowance (£12,570 in 2024/25), effectively paying a 60% marginal tax rate on income between £100,000 and £125,140.

   
   

These combined effects make the region just over £100,000 especially expensive, both in terms of lost entitlements and higher effective taxation.

Strategies to Keep Your Adjusted Net Income Under £100,000

1. Maximise Pension Contributions

One of the most effective ways to reduce ANI is to contribute more to your pension. Pension contributions are tax-deductible, meaning they reduce your taxable income.

Example:If you earn £110,000 and pay £10,000 into a personal pension scheme, your adjusted net income would fall to £100,000, preserving your free childcare and personal allowance. Note that for a personal contribution, you only need to contribute 80% of the amount you need to get down to £100,000. This is because your pension provider will automatically apply basic rate tax relief on top of your personal contribution. So in this example, a personal contribution of £8,000 would become £10,000 after tax relief is applied.

Tip: Use salary sacrifice schemes if your employer offers them - these reduce your income before it is taxed. This is the easiest way of making a pension contribution and also provides National Insurance contribution savings too. Tax relief is already included in this form of pension contribution.

2. Make Gift Aid Donations

Charitable donations under the Gift Aid scheme also reduce your ANI. Gift Aid boosts your donation by 25%, and higher-rate taxpayers can claim the difference via tax relief.

Example:A £1,000 Gift Aid donation could reduce your ANI by up to £1,250.

Tip: Keep records and declare all donations on your Self Assessment tax return.

3. Avoid Bonus Cliffs or Defer Income

Ask your employer if it's possible to defer income or bonuses into the next tax year - particularly if a large bonus would push you just over the £100,000 mark.

Tip: This requires careful planning and good communication with your employer.

4. Transfer Income-Producing Assets to a Spouse

If your spouse or partner earns less than you, consider transferring income-generating assets (e.g., rental properties, dividend-producing shares, high-interest savings accounts) to them.

This not only reduces your ANI but can also take better advantage of their lower tax brackets.

5. Use ISA Allowances

Investing in ISAs (Individual Savings Accounts) means that any income (dividends or interest) generated doesn’t count towards your ANI.

Make sure you're using your full ISA allowance (£20,000 per person for 2024/25).

6. Manage Self-Employment and Business Income Timing

If you're self-employed or run a business, look at how and when you recognise income and expenses.

Example: Delay issuing invoices near the end of the tax year, or bring forward allowable expenses.

Tip: Work closely with an accountant to ensure you're compliant while optimising your tax position.

7. Reduce or Reclaim Benefits-in-Kind

Company cars and private health insurance can actually increase your ANI through benefits-in-kind. You could consider:

• Opting out of a company car scheme

• Choosing lower-emission vehicles

• Discussing alternative benefits with your employer

  
  

8. Explore Salary Sacrifice Beyond Pensions

Some employers offer salary sacrifice for:

• Childcare vouchers (if you joined the scheme before it closed to new applicants)

• Cycle-to-work schemes

• Electric vehicles (especially tax-efficient)

  
  

These can reduce your gross salary, and therefore your ANI.

Common Pitfalls to Avoid

• Forgetting to factor in bonuses or RSUs (restricted stock units) into your ANI - note that any company shares will count as income in the year they vest.

• Ignoring dividend income from personal investments or family-owned businesses.

• Failing to claim relief on qualifying pension or charitable contributions.

• Missing the opportunity to plan income across tax years to avoid the cliff edge.

  
  

Final Thoughts: Plan Ahead and Get Advice

Staying below the £100,000 adjusted net income threshold requires awareness and proactive planning. For many families, the value of 30 hours of free childcare per week far outweighs a small increase in income - especially when the effective tax cost is factored in.

By using the tools available - pensions, Gift Aid, tax reliefs, and income planning -families can optimise their tax situation and retain access to this vital benefit.

Working with a tax adviser or financial planner can be particularly helpful if your income is close to the threshold, or if you have complex sources of income.

Resources and Tools

• HMRC Adjusted Net Income

• Free Childcare Eligibility Checker

You don’t have to earn drastically less to keep your childcare support—you just need to be smart with your finances.