High earners are being advised to take advantage of a pension hack that could save them thousands on childcare costs and boost their retirement income.

Individuals earning more than £100,000 are denied most elements of free childcare and tax savings on childcare costs.

However, finance experts say that these high earners can combat this by bringing down their income below the £100,000 cliff edge by making contributions to their private or workplace pension.

Experts at Moneyfarm said the eligibility for receiving free and tax-free childcare is limited to households where an individual earns at least £8,670 and no more than £100,000.

This means that a two-income household where both parents earn £99,000 can apply, but a household where one parent earns £100,001cannot and has to pay full price for childcare.

Separately, individuals earning more than £100,000 also lose their personal tax allowance, which reduces by £1 for every £2 they earn over this threshold until it gets to zero.

Bringing down net income to below £100,000 by boosting pension contributions means that individuals retain both their personal tax allowance and access to extended free childcare.

Carina Chambers, Pensions Technical Expert for Moneyfarm, said: “With the cost of childcare already at eye-watering levels, finding ways to make sure you keep every penny offered to you by the current system is simply a no-brainer.

“Using your pension to stay below the tax threshold represents a win-win situation. You can invest more for your retirement, which could compound and grow over time, while ensuring you pay less in tax and remain eligible for both tax-free childcare and free childcare hours.”

Moneyfarm said that adopting this tactic could currently save an individual £5,253 a year in terms of childcare costs for a single youngster. But it said the figure would be a higher £6,498 in London, where childcare costs are higher.

These figures are based on access to 15 free hours plus a tax reduction on the cost of childcare for babies and toddlers. However, the figures are higher when looking at the fact older children are entitled to 30 hours of free childcare plus tax relief on the other costs.

Under this scenario, Moneyfarm puts the annual saving at £8,506 based on the UK average cost of childcare and as much as £10,996 in London.

Significantly, the parents of all children aged 9 months to four will be entitled to 30 hours of free childcare a week from September next year. However, earners paid more than £100,000 will be excluded unless they can bring down their net pay below six figures.

Tax-free childcare

You can get £500 every 3 months (up to £2,000 a year) for each child to help with the costs of childcare. This goes up to £1,000 every 3 months if your child is disabled.

How to apply

You open a government childcare account online and for every £8 you pay in the government will credit the account with £2. The money can then be used to pay for ‘approved childcare’, e.g. nurseries, nannies, after-school clubs, etc.

Details can be found here.

Who is eligible?

Your child must be 11 or under.

You and your partner (if you have one) must each be working 16 hours per week and earning at least the National Minimum Wage on average.

You will not be eligible if either of you has ‘adjusted net income’ over £100,000.

Free childcare hours

All children aged two to four get 15 hours of free childcare per week during term time (i.e. 38 weeks a year), regardless of their parents’ earnings. This is known as the ‘universal hours’.

The allowance goes up to 30 hours for ‘eligible working parents’. However, the extra hours are lost if either parent has an adjusted net income above £100,000.

These rules are due to change:

From September 2024, 15 hours of free childcare will be extended to all children from the age of nine months to four.

From September 2025, working parents of children under the age of five will be entitled to 30 hours of free childcare per week.

However, once again any household with an adjusted net income above £100,000 will not be entitled to the extra free hours.