Can salary sacrifice reduce your adjusted net income and improve childcare eligibility?
By Katharine, Founder, EMBR Tax
Last updated for the 2026/27 tax year · 12 July 2026
Why can salary sacrifice matter for childcare eligibility?
Salary sacrifice reduces your contractual pay — and pay you never receive does not count towards adjusted net income. That means a properly structured arrangement can bring expected income back under the £100,000 threshold that decides both Tax-Free Childcare and 30 hours funded childcare eligibility in 2026/27.
Why it can matter:
- Lower contractual pay may reduce adjusted net income
- That may affect Tax-Free Childcare or Free Childcare for Working Parents
- It can also improve wider tax efficiency if the arrangement is run properly
For example, sacrificing £6,000 of a £105,000 salary into a pension could restore eligibility for childcare support worth up to £2,000 per child in Tax-Free Childcare top-ups, plus funded hours — while also saving Income Tax and National Insurance on the amount sacrificed.
What are the conditions that determine whether it works?
That does not mean salary sacrifice is a guaranteed answer. It depends on how the arrangement is structured, whether it genuinely changes contractual pay, and what other income you have.
What is the bottom line?
If you are close to a childcare threshold, salary sacrifice may be one of the areas worth checking. Just make sure the arrangement is real, employer-backed, and reviewed as part of the bigger tax picture.
Frequently asked questions
Can salary sacrifice affect childcare eligibility?+
It can, because lower contractual pay may reduce adjusted net income, which may affect Tax-Free Childcare or Free Childcare for Working Parents eligibility.
Does salary sacrifice always improve childcare eligibility?+
Not automatically. It depends on how the arrangement is structured, whether it genuinely changes contractual pay, and what other income you have.
What should you check if you are close to a childcare threshold?+
Make sure the arrangement is real, employer-backed, and reviewed as part of the bigger tax picture. Salary sacrifice may be one of the areas worth checking if you are close to a childcare threshold.
Related guides
- How does salary sacrifice for pensions work, and is it right for you?
Salary sacrifice for pensions can reduce taxable pay and adjusted net income. Understand the rules, catches, and what to check before opting in.
- Who is eligible for Tax-Free Childcare, and what does the £100,000 income rule mean?
If you or your partner expect adjusted net income over £100,000, you are not eligible for Tax-Free Childcare. Here is what the rules mean and how to check.
- What is the income rule for 30 hours free childcare, and could it affect your household?
The 30 hours scheme has a hidden income rule. If adjusted net income exceeds £100,000, either parent can make the whole household ineligible.