Written by UKSalarySacrificeCalculator Editorial. Reviewed against official UK guidance. Methodology
How Salary Sacrifice Can Reduce Childcare Costs: Adjusted Net Income and 30 Hours Free
Pension salary sacrifice reduces your adjusted net income (ANI). This can restore eligibility for 30 hours free childcare, avoid the high income child benefit charge, and lower your effective marginal rate. Here is how.
What is adjusted net income and why does it matter?
Adjusted net income (ANI) is your total income after deducting gross pension contributions (not just relief received). It is the figure HMRC uses for several threshold tests. ANI above £100,000 triggers personal allowance tapering at £1 for every £2 of excess, creating an effective 60% marginal tax rate in the £100,000–£125,140 band. ANI above £60,000 triggers the High Income Child Benefit Charge. ANI above £100,000 also removes eligibility for the 30 hours free childcare offer.
Salary sacrifice reduces your gross pay, which directly reduces ANI. Unlike relief at source or net pay contributions which are added back under the gross basis, salary sacrifice reduces the starting income figure, so it is the most efficient method for bringing ANI below these thresholds.
The 30 hours free childcare threshold
The 30 hours free childcare offer is available to families where each working parent (or single parent) earns less than £100,000 ANI and at least the equivalent of 16 hours per week at the National Living Wage. The £100,000 limit is a hard cliff, exceed it by £1 and you lose 15 hours of free provision per week. For a family using 30 hours, losing the additional 15 hours can cost thousands of pounds per year in childcare fees.
If your income is between £100,000 and approximately £110,000 and you have children aged 3–4, pension salary sacrifice is an extremely high-value strategy. Each pound sacrificed reduces ANI by £1. If £5,000 of salary sacrifice brings your ANI from £103,000 to £98,000, you restore 30-hour eligibility. The total value, childcare saving plus income tax saving at 60% effective rate plus NI saving, makes this one of the most compelling uses of salary sacrifice available.
The High Income Child Benefit Charge
Child benefit for 2026/27 is £25.60 per week for the eldest child (£1,331 per year) and £16.95 per week for each additional child (£882 per year). The HICBC claws back 1% of total benefit for every £200 of ANI above £60,000. At £80,000 ANI the full benefit is repaid. If your ANI is between £60,000 and £80,000 and you receive child benefit, salary sacrifice can reduce the clawback meaningfully.
For example, ANI of £65,000 with one child: clawback = (£65,000 − £60,000) / £200 × 1% × £1,331 = 25% × £1,331 = £333. If salary sacrifice reduces ANI to £61,000: clawback = 5% × £1,331 = £67. Net saving from the clawback reduction alone: £266 per year, on top of the normal income tax and NI saving from the sacrifice.
Worked example: ANI £103,000, two young children
A parent with two children aged 2 and 4, ANI of £103,000. They sacrifice £5,000 into a pension, reducing ANI to £98,000. Benefits: (1) Personal allowance restored: the £100k taper reduces the personal allowance by £1 for every £2 above £100k. At £103k the PA is reduced by £1,500, meaning 45% more tax on £1,500 = £675 saving. At £98k the PA is restored fully. (2) 30-hour childcare eligibility restored: saving potentially £5,000–£8,000+ per year in childcare fees. (3) Normal income tax saving on sacrifice at 40%: £2,000. (4) Employee NI saving: £5,000 × 2% (above UEL) = £100. Total saving substantially exceeds the £5,000 sacrificed.
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FAQ
What is the income limit for 30 hours free childcare?
In 2026/27 the 30 hours free childcare offer (for 3–4 year olds) requires both parents (or a single parent) to each earn at least the equivalent of 16 hours at NMW and less than £100,000 adjusted net income per year. If your ANI exceeds £100,000 due to income, salary sacrifice into a pension can bring it below that threshold and restore full eligibility.
Is Tax-Free Childcare the same as salary sacrifice for childcare?
No. Tax-Free Childcare is a government scheme where for every 80p you pay into an online childcare account, the government adds 20p, giving up to £500 per child per quarter (£2,000 per year). It is separate from salary sacrifice. Salary sacrifice for childcare referred historically to childcare vouchers, which closed to new entrants in October 2018. The indirect benefit of salary sacrifice now is through ANI reduction, not direct childcare vouchers.
Does salary sacrifice affect child benefit eligibility?
Yes. The High Income Child Benefit Charge (HICBC) applies when ANI exceeds £60,000. For every £200 of ANI above £60,000, 1% of child benefit is clawed back. At £80,000 ANI the charge equals the full benefit. Pension salary sacrifice reduces ANI, potentially reducing or eliminating the HICBC.