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

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. That is the headline. The number that actually matters if you run your own limited company is a different one, and almost nobody is publishing it: the well-known “60% tax trap” is not what an owner-director who pays themselves mostly in dividends actually faces. We ran the real figures through our own 2026/27 rates below, and the gap between the two is worth knowing before you decide on your next dividend.

£100,000 is not one trap. It is two, stacked on the same number, and they behave completely differently — one tapers, one falls off a cliff.

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 actual rather than projected income — are recommendations, not policy.

The 60% you have heard about — and the 48% nobody mentions

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:

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. That is not a loophole: it is simply how the two income types are taxed, and it means the salary/dividend split you already review every year deserves a second look specifically at the £100,000 line, not just at the usual higher-rate threshold.

The childcare cliff-edge is worse than the tax cliff-edge

Here is the part the 60% headline understates. 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, not gradually. For a family with two children in nursery, that is a genuine cliff, not a slope — which is exactly 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, not the household. 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 about it this week

Work out your own adjusted net income for this tax year, not last year’s. 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, not after.

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 a real, legitimate planning decision, not an avoidance one. 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. Which of those actually suits your numbers is exactly the kind of salary/dividend and pension question our tax planning service works through every year, 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 cuts both ways — if your expected income was under £100,000 but your actual income comes in above it, that is a mismatch between what you told the childcare service and what your tax return will eventually show, and it is better to catch that yourself than have it caught for you.

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, not confirmed policy, and nothing has been announced. 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 exactly the kind of measure that can move at a Budget without much notice beforehand. Nothing here should be planned around a change that has not happened; what is worth planning around is the gap between the 62% and 48.3% figures above, because that one is true today regardless of what October brings.

If you want your own salary/dividend split checked against the £100,000 line before you draw anything else this year, that is exactly what our tax planning service is built to do.