Thousands of working families could be deterred from accepting overtime or pay increases due to a stringent income threshold in the government’s free childcare scheme, a new analysis reveals. The key issue lies in the £100,000 income limit; exceeding this amount can lead to the sudden loss of free childcare entitlement, potentially leaving some parents financially worse off despite earning more.
Recent research conducted by the Centre for the Analysis of Taxation (CenTax) warns that by 2030, nearly 12,000 parents may deliberately keep their incomes just below this threshold to safeguard their childcare support. The concern is expected to intensify as the government expands childcare provision and as more families experience salary growth, bringing additional households close to the critical income point where benefits are withdrawn abruptly.
Using administrative tax data from HM Revenue and Customs, CenTax identified that around 1,100 parents of three and four-year-olds were already managing their earnings to remain under £100,000 in 2022 in order to retain free childcare eligibility. The projection indicates an eleven-fold increase in this behaviour by 2030.
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The financial implications are substantial, especially for families with younger children. Parents with children aged nine months to two years may receive up to 30 hours of free childcare weekly; losing this support could mean forfeiting thousands of pounds annually. CenTax estimates that in 2022, a typical affected parent would have needed to earn approximately £105,000 to be financially better off after losing free childcare. By 2030, this ‘break-even’ salary is expected to rise to £124,000.
The study also highlights that this earnings cliff edge disproportionately impacts women. In nine out of ten cases where one partner reduces work to care for a child, it is the mother who leaves the workforce.
Arun Advani, CenTax Director and Professor of Economics at the University of Warwick, emphasised the growing significance of the issue, stating, “Our analysis shows the childcare cliff-edge will expand significantly by the end of this parliament. However, solutions exist for the Government, such as preventing parents with incomes above the threshold from claiming free childcare.”
Concerns were also raised about the current method of assessing income expectations rather than actual income, which can lead to perceptions of unfairness. The research found that one-third of parents whose final incomes ranged between £100,000 and £120,000 still received free childcare. While this does not necessarily indicate rule violations, it results in families with similar earnings receiving different levels of support.
Jack Pepin-Hall, a research economist at CenTax, advocates for basing eligibility on actual reported earnings rather than predicted income, suggesting this would make the system fairer and allow the income threshold to rise above £110,000 without extra cost.
Removing the £100,000 threshold entirely is projected to cost around £640 million by 2030. However, CenTax proposes more affordable alternatives: raising the threshold to £125,000 for approximately £100 million or extending 15 hours of universal free childcare to children under three at a cost of about £210 million.
Another recommended adjustment is introducing a taper instead of an abrupt cut-off-reducing childcare entitlement incrementally by 28p for every £1 earned over £100,000. This approach would ease the impact on families and is expected to be broadly revenue neutral, potentially generating around £20 million.
This research was funded by the Nuffield Foundation, with additional support from the University of Warwick and the Economic and Social Research Council.