Two pupils were to transfer to his Midlands school on the Monday before census day, taking numbers up to 201. The extra pupils, would have brought the school pound;12,000. Primaries with between 201 and 400 children receive pound;30,000, while primaries with 101 to 200 get pound;18,000.
But the pupils' parents decided to postpone the move.
Then a member of staff at the school offered to transfer her two children for the day and then transfer them back to their own school.
The head, who does not want to be named, said: "I checked with the local authority. It was perfectly legitimate, if a little unusual.
"I also checked with the other headteacher, offering to make up the few hundred pounds he would lose through per pupil formula funding as a result of the exercise. He was agreeable too."
But in the end the member of staff and head decided not to go ahead with the transfer.
Chris Lowe, honorary legal consultant to the Secondary Heads Association and TES columnist, said: "The law is clear that if a child signs on at one school and has been signed off at another school, then they count. But it is highly dubious and smacks of dishonest practice.
"The Audit Commission has picked up on lesser things than that."
The commission confirmed that if a transfer had taken place it would be a matter for the authority's internal auditors.
The head said: "No headteacher should ever be placed in this sort of dilemma. Should I have put the good of my school, its staff and its children above my personal principles? I am totally relaxed in the knowledge that I have done nothing unacceptable and, at the same time, totally despondent about the consequences."
The two pupils who considered transferring have decided to stay put. Other families have since made enquiries about their children attending the school.
Education budgets for next year are finalised in March. There is still a chance that a compulsory redundancy could be avoided at the school through a member of staff leaving or an increase from other funding streams.