Working families are missing out on a staggering £874 million in childcare support because the HMRC earnings threshold has not kept pace with inflation, according to new analysis from wealth manager Quilter. The £100,000 limit, which determines eligibility for Tax-Free Childcare and 30 hours of funded childcare, is now £37,000 lower than it should be if it had risen in line with inflation since 2018.
Quilter's research reveals that between 50,500 and 99,000 children were affected by the £100,000 earnings limit in the 2025/26 tax year, based on Department for Education (DoE) figures. If the threshold had been uprated with inflation, it would now stand at approximately £137,000, meaning many more families are being caught in what experts describe as one of the sharpest financial cliff edges in the system.
The £100,000 cliff edge: How the threshold works
The eligibility rule applies to parents of children aged between nine months and two years old, who can receive up to 30 hours of funded childcare per week. However, this support is only available to parents with an adjusted net income below £100,000. The limit applies to each parent individually, not to combined household income, which can create surprising outcomes.
For example, a couple where both earn £70,000 each would pass the eligibility test, while a couple where one earns £101,000 and the other £30,000 would not. This means a single parent earning £101,000 loses all access to the scheme, even though their household income might be lower than that of a dual-income family that qualifies.
Inflation has eroded the threshold's value
Ian Futcher, financial planner at Quilter, highlighted the growing impact of the frozen threshold. "These figures demonstrate how a threshold that once affected a relatively small number of families is now having a much wider impact," he said. "While £100,000 is still a high income, it is not worth what it was when this threshold was set. As earnings and childcare costs have risen, more families are finding themselves caught by rules that were designed in a different economic environment."
The £37,000 gap between the current threshold and the inflation-adjusted level of £137,000 means that families earning between £100,000 and £137,000 are now excluded from support that was originally intended for them. This is particularly problematic given the rising cost of childcare in the UK, which has outpaced wage growth in recent years.
Pay rises and promotions can trigger unexpected losses
The impact can be sudden and severe. Futcher explained, "The childcare income limit creates one of the sharpest financial cliff edges in the system. If a parent's adjusted net income exceeds £100,000, their family loses eligibility for the working parents' childcare entitlement entirely. In practice, that can mean a pay rise, promotion or bonus unexpectedly results in the loss of support worth thousands of pounds."
Parents who receive a bonus or overtime that pushes them over the threshold can find themselves worse off overall, as they lose access to Tax-Free Childcare and 30 hours of funded care. This can amount to thousands of pounds in additional childcare costs, potentially negating the financial benefit of the pay increase.
What support is available?
Tax-Free Childcare allows working parents to claim up to £2,000 per child per year (or £4,000 for disabled children) towards childcare costs. The 30 hours of funded childcare for children aged nine months to two years is a separate scheme, but both are subject to the same £100,000 adjusted net income limit. Other conditions, such as employment status, child age, and immigration status, also apply.
Quilter's analysis underscores a growing concern among financial experts that the threshold is unfairly penalising higher-earning families, particularly in regions like the West Midlands where the cost of living is high but wages are not keeping pace. The firm is calling on the government to review the threshold and consider indexing it to inflation to prevent further erosion of support.
What can affected families do?
For parents who are close to the threshold, financial planning can help mitigate the impact. Options include making additional pension contributions to reduce adjusted net income, using salary sacrifice schemes for benefits like cycle-to-work or childcare vouchers (where still available), or timing bonuses and other income to avoid crossing the limit in a given tax year.
However, Futcher advises that these strategies require careful planning and may not be suitable for everyone. "It's essential for families to seek professional advice if they are approaching the threshold, as the financial implications can be significant," he added.
Government urged to act
The Labour Party government, which introduced the expansion of funded childcare, has faced criticism for not addressing the frozen threshold. With the next general election looming, campaigners are urging policymakers to consider the impact on working families and to adjust the threshold in line with inflation.
As childcare costs continue to rise, the issue is likely to remain in the spotlight. For now, families affected by the threshold must navigate a system that, according to Quilter, is no longer fit for purpose in the current economic climate.
