Number of parents at edge of £100k tax trap to ‘grow dramatically’

Tax researchers have warned that the number of parents near the £100,000 threshold will surge dramatically to access free childcare. The Centre for the Analysis of Taxation (Centax) predicts nearly 12,000 parents could deliberately keep their income under £100k to secure the benefit. This would be an increase of nearly 11,000 parents from 2022 when only about 1,100 parents were in this group.

Former Chancellor Jeremy Hunt's state-funded childcare scheme introduced in March 2023 allows parents earning less than £100k to receive 30 hours of free childcare per week. The government is reviewing the success of this policy, which costs nearly £5bn per year. Centax found that one third of parents earning between £100k and £120k also claimed and received free childcare due to a loophole.

The system should use actual income rather than projected income, and the threshold could be raised to £111k without additional fiscal cost, according to Centax. Removing the threshold for free childcare entitlement would cost about £640m in 2030, according to the researchers. The £100k tax trap has affected workers facing a higher effective tax rate compared to those earning over £125k, leading to a 60% effective tax rate for those earning between £100k and £125k. This has stunted wage growth as workers have fewer incentives to seek higher salaries.