The £100,000 tax trap for parents who run a company

Reacting to: Number of parents at edge of £100k tax trap to ‘grow dramatically’ (City A.M.) →

City A.M. reported today on research from the Centre for the Analysis of Taxation (Centax): nearly 12,000 parents are now estimated to be deliberately holding their income below £100,000 to keep free childcare, up from about 1,100 in 2022. If you run your own limited company and pay yourself mostly in dividends, your marginal rate above £100,000 is lower than the well-known “60% tax trap”. The figures below use our 2026/27 rates, so you can see the gap before you decide on your next dividend.

Two separate rules start at £100,000. The personal allowance tapers away gradually, and the free childcare entitlement stops in full.

What Centax actually found

The scheme itself is not new. Former Chancellor Jeremy Hunt introduced 30 hours a week of free childcare for under-fives in March 2023, available where each parent’s individual adjusted net income is under £100,000. It now costs the government almost £5bn a year and the government is reviewing how well it is working.

Centax’s contribution is showing how the behaviour around that £100,000 line is changing. In 2022, about 1,100 parents of three- and four-year-olds held their income just under £100,000. Centax now estimates that figure at close to 12,000 — nearly an elevenfold rise — as ordinary pay growth pushes more people up against a threshold that has not moved since the scheme launched. Separately, Centax found that a third of parents earning between £100,000 and £120,000 are still claiming and receiving free childcare, through a loophole in how eligibility is checked: parents self-declare their expected income for the year rather than being assessed on what they actually earned. Centax’s director, Arun Advani, put it plainly: “the childcare cliff-edge stands to grow dramatically by the end of this parliament, but there are solutions available to the government.” Its proposed fixes — raising the threshold to £111,000 at no extra cost, or assessing income actually received instead of projected income — are recommendations and have not been adopted.

The marginal rate on salary and on dividends above £100,000

The tax mechanics behind all this are well established. HMRC tapers your £12,570 personal allowance away by £1 for every £2 you earn above £100,000, so it reaches zero at a fixed £125,140. Squeeze £2,000 of previously tax-free income into the 40% higher-rate band and you get the famous 60% marginal rate. City A.M.’s piece states this correctly — for an employee. It is not the number a limited company owner-director actually faces, because most owner-directors are not paid mostly in salary.

We ran both scenarios through our own 2026/27 tax calculators, illustratively, for a business owner deciding whether to draw an extra £5,000 between £100,000 and £105,000 of total income:

	Salary/earnings	Dividend (£12,570 salary + rest dividends)
Extra income drawn	£5,000	£5,000
Extra income tax	£3,000	£2,412.50
Extra employee NI	£100	—
Effective marginal rate	62.0%	48.3%

Same £5,000, same £100,000 starting point, same personal allowance taper doing the damage underneath — and a £687.50 difference in what is left in your pocket, because dividend tax rates for 2026/27 run lower than income tax plus employee National Insurance. When you review your salary/dividend split, check it at the £100,000 line as well as at the usual higher-rate threshold.

The childcare cliff-edge at £100,000

The personal allowance taper is gradual — every extra pound earned above £100,000 costs you more tax, but you keep some of it, all the way to £125,140. The childcare entitlement does not taper at all. Cross £100,000 of adjusted net income by a single pound and, per gov.uk’s own eligibility wording, you lose the 30 free hours and Tax-Free Childcare in full, all at once. For a family with two children in nursery, the whole entitlement goes at once, which is why Centax found a third of £100,000–£120,000 earners are still claiming it anyway, on the basis of an expected income figure that may turn out to be wrong once the year closes.

Worth being precise on one point the coverage sometimes blurs: the £100,000 test is applied to each parent individually, and never to the household total. Two parents each earning £95,000 keep the entitlement in full. One household with a sole earner on £110,000 does not, even though its total income is lower. If your household income sits either side of that line, it is worth checking which parent’s figure is actually doing the work.

What to do this week

Work out your own adjusted net income for this tax year. HMRC’s guidance on adjusted net income sets out the calculation, and gov.uk’s own 30 hours free childcare and eligibility checker pages confirm the £100,000 test in the government’s own words. If you are a director deciding on a dividend before the tax year end, do this calculation before the payment goes out.

Use the levers that actually move the figure. HMRC’s adjusted net income guidance confirms that gross pension contributions and Gift Aid donations both reduce it — which is ordinary, legitimate planning. For an owner-director that can mean timing a dividend, increasing an employer pension contribution instead of drawing extra, or splitting a bonus across two tax years. Our tax planning service works out which of those suits your numbers, alongside the levers in financial planning for the pension side of it.

If you are already over £100,000 and claiming, check what you declared. Centax’s loophole point applies here: if your expected income was under £100,000 but your actual income comes in above it, what you told the childcare service will not match what your tax return shows. Correct it with the childcare service yourself.

What is still uncertain, and when we will know

Three things are not yet settled. The threshold itself — Centax’s £111,000 proposal and its actual-income proposal are recommendations to government. Nothing has been announced and none of it is policy. The scheme review — the government has said it is reviewing how well Hunt’s childcare policy is working, with no published timeline for that review’s conclusions. The Budget — the Chancellor’s first Budget falls on 28 October 2026, and childcare thresholds, along with personal allowances generally, are measures that can change at a Budget without much notice. Plan around the gap between the 62% and 48.3% figures above, which applies today, and not around a change that has not been announced.

Our tax planning service can check your salary/dividend split against the £100,000 line before you draw anything else this year.

Andy Jackson

Straight Talk. Real Solutions. Better Business. I'm here to make your business more efficient and client-focused — no fluff, just honest advice and real results. I'm not here to waste your time with fancy buzzwords or unrealistic promises. I work with businesses that want straightforward, practical advice on how to improve. I'm passionate about creating real impact through digital transformation, improved processes, and a laser-focus on client experience. andyjackson.com

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Common questions

What exactly is the £100,000 tax trap?

It is two separate things that both trigger at the same £100,000 adjusted net income figure. First, your personal allowance tapers away — HMRC removes £1 of the £12,570 tax-free allowance for every £2 you earn above £100,000, so it hits zero at £125,140, which is what produces the well-known 60% effective income tax rate in that band. Second, if you have a child, you lose eligibility for 30 hours of free childcare and Tax-Free Childcare entirely — not tapered, gone in full the moment either parent's adjusted net income passes £100,000. Centax's research, covered by City A.M. on 10 September 2026, is about the second trap: it estimates nearly 12,000 parents are now deliberately keeping their income under £100,000 to keep the childcare, up from about 1,100 in 2022.

Does the childcare cliff-edge catch me if my partner earns under £100,000 too?

The test in gov.uk's own eligibility wording is that both you and your partner's individual adjusted net income must be under £100,000 — it is not your combined household income. Two parents each earning £95,000 keep the entitlement; one household with a single earner on £110,000 and a partner earning nothing does not, even though its total income is lower. That asymmetry is exactly why the trap concentrates on one earner's income rather than the couple's total, and it applies the same way whether that income is salary, dividends or self-employment profit. For a couple who both hold shares in the same company, it is also one of the few places where how dividends are split between two working shareholders can protect an entitlement worth thousands a year, well beyond shifting who pays a bit more tax — worth raising directly if either of you is anywhere near the line.

Is the 60% tax rate the same for a limited company owner as for an employee?

No, and this is the part most coverage of the £100,000 trap misses. The 60% figure assumes the extra income is salary or profit, taxed as earnings. Run the same £5,000 through Buzz's own 2026/27 tax calculator as a dividend on top of a £12,570 salary — the classic owner-director structure — and the marginal rate on that £5,000 comes out at 48.3%, because dividend tax rates are lower than income tax plus employee National Insurance. The personal allowance taper still bites either way; what differs is the rate applied to the income it displaces.

How do I bring my adjusted net income below £100,000?

HMRC's own guidance on adjusted net income confirms that gross pension contributions and Gift Aid donations both reduce the figure used for the personal allowance taper and the childcare test. For an owner-director, that means the decision of how much to draw as salary, how much as dividend, and how much to leave in the company or divert to a pension is a genuine lever, designed into the rules, and it is worth running before the tax year end. A director paying £5,000 gross into a pension in the same tax year it is earned, for example, brings adjusted net income down pound for pound, which can restore the full childcare entitlement as well as reducing the personal allowance taper. Dividends cannot be reduced retrospectively once paid, so the calculation has to be done before the dividend is voted, not after.

Is the £100,000 threshold going to change?

Nothing has been announced. Centax has proposed two fixes: raising the childcare threshold to £111,000 at what it says is no additional fiscal cost, or assessing eligibility on actual rather than projected income. Neither is government policy. The Chancellor's first Budget falls on 28 October 2026, and the government has separately said it is reviewing the childcare scheme's performance — so this is still an open question, and nobody should plan around a change that has not been confirmed. Until then, treat £100,000 as fixed and plan the current tax year against it rather than waiting to see what the Budget brings — a dividend voted in March on the assumption of a higher threshold that never arrives cannot be undone.

Or get in touch and we will reply the same working day.

The £100,000 tax trap is about to catch far more parents — and it costs owner-directors a different amount