A pay rise can leave you wondering whether a pension contribution would protect childcare support. The useful question is not "Is my salary above £100k?" It is "What will each parent's adjusted net income be this tax year, and what would changing pension contributions do to our monthly cash flow?" This guide concerns England's working-parent funded hours and the separate Tax-Free Childcare scheme.
Start with the full income picture
GOV.UK excludes a family from these schemes if either parent expects adjusted net income over £100,000 for the current tax year. Adjusted net income includes taxable employment income and benefits, alongside income such as interest, dividends and rent, less qualifying reliefs. A pension deduction on a payslip is not, by itself, a complete income calculation.
Write down the expected bonus, taxable share awards and other income before choosing a contribution. The salary versus adjusted net income guide covers that calculation. Check the other parent separately: reducing one parent's income does not solve the other parent being above the limit.
What pension salary sacrifice changes
Salary sacrifice is an agreed change to your employment contract: you give up entitlement to some cash pay in return for a benefit, such as an employer pension contribution. An effective pension arrangement reduces taxable cash earnings. HMRC's example of sacrificing a bonus for an employer pension contribution shows no employment income tax or National Insurance charge on that sacrificed bonus.
The change needs to take effect at the right time. You cannot assume payroll will retrospectively sacrifice income you have already become entitled to. Ask payroll about its deadlines, which pay elements can be sacrificed, and the actual revised taxable pay. The arrangement must not take cash earnings below the National Minimum Wage.
A simplified example, not a recommended contribution
Assume one parent expects £105,000 of taxable employment income, no other taxable income and no existing deductions relevant to this example. An effective £6,000 pension salary sacrifice would leave £99,000 of taxable employment income. With those assumptions, adjusted net income would also be £99,000. The sacrificed £6,000 goes into the pension; it is not cash available for nursery bills.
Now add £2,000 of taxable bank interest. The same arrangement would leave adjusted net income at £101,000, before any other qualifying reliefs. The salary number looked safe, but the complete calculation did not. These figures illustrate the test, not a promise of approval or an estimate of take-home savings.
Do not deduct the same pension contribution twice
Salary sacrifice has already reduced taxable cash pay. Do not subtract the employer pension contribution again when calculating adjusted net income. A net-pay workplace pension also normally reduces taxable pay before Income Tax. A relief-at-source pension works differently: HMRC's adjusted net income guidance uses the gross contribution, including basic-rate tax relief.
For example, £4,800 paid to a relief-at-source pension is £6,000 gross after £1,200 basic-rate relief, assuming the contribution qualifies. Use the method your actual pension uses. The salary sacrifice versus SIPP guide compares the routes; neither should be chosen from a childcare headline alone.
Check the cost to the household
- Ask payroll for the take-home-pay change and when it starts. Budget using that figure, not the gross amount sacrificed.
- Check how the employer calculates enhanced pay and other salary-linked benefits. HMRC warns that salary sacrifice can affect statutory pay and entitlement.
- Check pension annual allowance, any tapered or money purchase annual allowance, and employer contributions before increasing payments.
- Keep enough accessible cash for leave, nursery deposits and bills. Money paid into a pension is not a substitute for a cash buffer.
Income below £100k is only one part of eligibility
The schemes have work, minimum-earnings, child-age and other conditions. GOV.UK describes the minimum-earnings test as expected earnings over the next three months, generally equivalent to 16 hours a week at the relevant minimum wage, with exceptions. That is separate from the annual adjusted net income ceiling. Do not assume a large sacrifice is harmless where cash earnings are low; get the current eligibility position checked.
Universal 15 hours for three- and four-year-olds in England remain available regardless of parental income, from the term after the third birthday. The eligible working-parent total is 30 hours for 38 weeks, not 30 hours added on top of universal 15. Use the nursery-budget guide to translate eligibility into the provider's actual bill.
Before the next reconfirmation
- Refresh both parents' expected adjusted net income, including bonuses and other income.
- Confirm the pension method and effective payroll date in writing.
- Check the childcare account's reconfirmation deadline and answer using a reasonable current estimate.
- Revisit the estimate when pay, work or family circumstances change rather than assuming an old salary calculation still holds.
Start with the free first-year chapter
The £100k Baby, by Practical Finance, brings childcare, leave, pensions and first-year cash flow into one plan. This article promotes the book. Start with the free PDF chapter; the paid book is optional. General education, not personal tax or financial advice. Rules checked 30 September 2026.