Half of people are unaware that pension contributions can reduce adjusted net income
Pensions are designed to help fund retirement, but they can also play a valuable role in wider financial planning. This could be particularly important for parents balancing the high cost of childcare, with holiday clubs alone costing families an average of £179 per week.
Yet 52% of people do not realise that pension contributions can reduce adjusted net income, according to a recent nationwide survey[1]. Adjusted net income is used to assess eligibility for several forms of childcare support, so some parents could benefit from understanding how their pension fits into their wider finances and how contributions could affect their overall tax position.
£100k threshold explained
For eligible working parents in England, the Government’s 30 hours of funded childcare is available to children aged nine months to four years, subject to eligibility. However, if either parent’s expected adjusted net income exceeds £100,000, they are ineligible for the working-parent offer.
This can create a significant financial cliff edge for families whose income is close to the threshold. The £100,000 limit applies to individuals rather than to household income, so if one parent exceeds it, the family’s eligibility for the funded working-parent hours may be affected. A relatively small increase in income could therefore have a disproportionately large impact on household childcare costs.
How pensions could help
For some parents close to the threshold, increasing pension contributions could reduce adjusted net income while boosting retirement savings. This may be particularly relevant for those whose income has risen through a pay rise or bonus and who are concerned about moving above the childcare threshold.
Salary sacrifice may also be an option where offered by an employer. Under such an arrangement, an employee gives up part of their salary in return for an employer pension contribution, which can reduce adjusted net income. However, the impact varies with individual circumstances and workplace arrangements, so parents should understand the implications before making changes.
Making the most of support
Parents approaching the threshold should look beyond their headline salary and consider bonuses, pension contributions and other taxable income when assessing their adjusted net income. It is also worth checking eligibility for Tax-Free Childcare, which has its own £100,000 adjusted net income limit.
Childcare eligibility needs to be reconfirmed periodically, which serves as a useful prompt to review household finances, savings and pension contributions. Keeping track of income changes throughout the year can also help parents avoid unexpected changes to their childcare support.
Planning for today and tomorrow
Family finances often require balancing immediate costs with longer-term goals. Understanding how pension contributions interact with tax and childcare rules could help some parents make more informed decisions, particularly when their income is near a key threshold.
Significant financial changes should always be considered carefully, as pension contributions can affect take-home pay and other aspects of your financial position. A broader review can help ensure that any decision supports both your family’s current needs and your longer-term retirement plans.
Source data:
[1] Opinium surveyed 2,000 UK adults nationwide between 9–16 June 2026. Quotas and post-weighting were applied to the sample to ensure it was representative of the UK adult population. The average price of holiday childcare in Great Britain is £179 per week per child, up 4% on 2024. Coram Family & Childcare’s 2025 ‘Holiday Childcare’ survey: https: www.coramfamilyandchildcare.org.uk/research/holiday-childcare-survey-2025
This article does not constitute tax, legal or financial advice and should not be relied upon as such. For guidance, seek professional advice. A pension is a long-term investment not normally accessible until age 55 (57 from April 2028, unless the plan has a protected pension age). The value of your investments (and any income from them) can go up or down, which would affect the level of pension benefits available. Investments can rise or fall in value, and you may receive back less than you invested.