Thousands of UK parents face being trapped in a £100,000 'cliff edge' because of an HMRC tax rule that strips free childcare from those earning above the threshold, according to new research from the Centre for the Analysis of Taxation (CenTax). The analysis, based on HM Revenue and Customs administrative tax data, forecasts that almost 12,000 mothers and fathers could be deliberately holding down their incomes to avoid losing government-funded childcare by 2030.
What the research found
CenTax researchers said the policy creates a powerful incentive for parents to avoid taking on extra work, overtime, promotions or pay rises. In 2022, around 1,100 parents of three and four-year-olds were already holding their income just below £100,000 specifically to avoid crossing the threshold. By 2030, that number is expected to surge to almost 12,000, as the childcare offer has expanded and more taxpayers move above the £100,000 level.
The rule means working parents can lose their entitlement to Labour Party government-funded childcare if either parent expects to have an income of more than £100,000. The financial penalty can be particularly severe for parents of younger children, who can now receive up to 30 hours a week of free childcare for children aged nine months to two years.
Impact on families
Crossing the £100,000 threshold can mean losing thousands of pounds worth of support. CenTax estimates that in 2022 the median affected parent would have needed to earn around £105,000 to be no worse off after losing their childcare entitlement. By 2030, that figure is expected to rise to £124,000.
The researchers warn that the cliff edge disproportionately affects women. In nine out of ten cases where one partner leaves the workforce to care for a child, it is the mother who does so, the report says.
Call for reform
Arun Advani, director of CenTax and professor of economics at the University of Warwick, said the problem was set to become much bigger. He 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."
The research also highlights what it describes as an unfairness caused by the way the £100,000 test currently operates. Parents are assessed on their expected adjusted net income rather than their eventual income for the tax year.
Jack Pepin-Hall, a research economist at CenTax, said: "If the Government chooses to keep an income test for free childcare, it should at least be based on parents’ actual reported incomes instead of what they claim they expect their incomes to be." As well as being fairer, this change would enable the Government to raise the threshold to just over £110,000 at no extra cost overall.
