A stark warning has been issued to UK households as a significant financial perk is set to be stripped away from those earning a specific income level. Families with an income of £100,000 are facing a punishing 'cliff edge', resulting in the loss of substantial government childcare support worth thousands of pounds annually.
The £100,000 Childcare Cliff Edge
Crossing the £100,000 earnings threshold triggers an immediate loss of access to Tax-Free Childcare, a scheme that can be worth up to £2,000 per child each year. Furthermore, the amount of free childcare hours for three and four-year-olds is halved from 30 hours to just 15 hours. This double blow creates a severe financial disincentive for high-earning parents.
The issue is compounded by other tax charges that activate at similar income levels. Earning £100,000 also means being fully ensnared by the High Income Child Benefit Charge (HICBC), which begins to taper at £60,000. Simultaneously, the personal allowance of £12,570 starts to be withdrawn for every pound earned over £100,000, creating an effective marginal tax rate of 60% for incomes between £100,000 and £125,140.
A Growing 'Tax Trap' Population
This punitive income bracket is capturing more people every year. According to estimates obtained by City AM, an additional 74,000 taxpayers entered the £100,000-£125,000 band last year alone. This represents a 12% annual increase and a near-doubling over five years, bringing the total number of people in this 'tax trap' to approximately 698,000.
Olly Cheng, senior financial planning director at Rathbones, commented on the phenomenon. “Earning £100,000 once felt like financial freedom, but today it often comes with a hidden tax sting,” he said. “Frozen thresholds are inflating tax bills, dragging more people into higher bands, while inflation erodes the real value of earnings.”
Advice for Navigating the Trap
Cheng identifies this group as HENRYs – 'High Earners, Not Rich Yet' – who struggle to build wealth due to the combined burden of high taxation and inflation. He offers a key strategy for mitigation. “One of the simplest ways to avoid or limit the impact of the 60% income tax trap is to pay more into your pension,” Cheng advised.
He specifically recommends making contributions via salary sacrifice. “Doing so not only saves on income tax but also National Insurance for both employee and employer, making it a more tax-efficient way to boost pension savings compared to personal contributions.” This approach can effectively lower an individual's taxable income, potentially keeping them below the critical thresholds that trigger the loss of valuable family support.
