Use pension contributions to keep your tax-free childcare benefits

If you earn more than £100k, you can lose access to tax free childcare and free childcare hours. But by increasing your pension contributions, you can prevent this from happening.


For working families, reducing your adjusted net income to fall below £100,000 by transferring some of your income into a pension pot, is a great way to protect your tax-free childcare allowance. This also applies if you need to qualify for the 30 hours of free childcare.


To access the tax-free childcare scheme along with the 30 hours of free childcare, both partners in a household need to be working and earning the national minimum wage for at least 16 hours per week.


However, there is a cap of £100,000 per year for each parent. If either parent’s individual income exceeds this amount, your family is no longer eligible for tax-free childcare.


Here are some simple steps to help you work out your adjusted net income:


Step 1 – Add up your taxable income, to include all the following where applicable:

  • Money you earn from employment (including any benefits you receive)
  • Profits you make if you’re self-employed, including from services you sell through websites or apps
  • Any state benefits that you access
  • Any pensions (including the state pension, company and personal pensions and retirement annuities)
  • Interest on savings and pensioners bonds that you receive
  • Dividends from company shares
  • Any rental income you have
  • Income from any trusts


Make sure to take off any tax reliefs that apply to you, such as:

  • Gross payments made to pension schemes without tax relief
  • Any trade losses you have experienced, for example trade loss relief or property loss relief

The output total is your ‘net income’.


Step 2

Deduct Gift Aid donations.

If you’ve made any Gift Aid donations through the year, deduct the ‘grossed-up’ amount, which is what you paid plus the basic rate of tax. In simple terms, for every £1 of Gift Aid donations you made, take £1.25 from your net income.


Step 3

Deduct pension contributions

If you’ve made a contribution to a pension scheme where your pension provider has already given you tax relief at basic rate, take off the ‘grossed-up’ amount, which is what you paid plus the basic rate of tax. So, for every £1 of pension contribution you made, take £1.25 from your ‘net income’.


Step 4

Add back in any tax relief for payments to trade unions or police organisations.

Tax relief of up to £100 is available if you make payments to a trade union or police organisation for superannuation, life insurance or funeral benefits. (If you took off an amount for this type of payment at step 1, you can add it back in!)


In summary, if you earn more than £100,000, pension contributions can be a great way to save tax and continue to access other relevant benefits.


Applications for the 30 hours of tax free childcare can be made here:


Remember, tax rules are subject to change, so staying up-to-date on the latest regulations is super important. It’s also a great idea to consult with a financial advisor or tax professional to explore the specific implications based on your personal circumstances. We’re always here to help if you want chat.

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