Tax-Free Childcare

Government scheme gives you up to £2,000 per child

Tax-free childcare

Tax-free childcare gives eligible families up to £2,000 free per child towards childcare costs. It was designed to replace the childcare vouchers scheme and launched in April 2017.

We explain what the scheme is and how it compares to childcare vouchers. Though the childcare vouchers scheme closed for new sign-ups on 4 Oct, you can still use them as long as your employer provides them. If you’re on vouchers but want to know if you’d be better off switching to tax-free childcare, use this guide.

In this guide

Tax-free childcare explained: The seven need-to-knows

Tax-free childcare is a Government-backed scheme which gives eligible families an extra 20% towards childcare costs. Essentially, you open a centralised account and the Government will add 20p for every 80p you pay in. You then pay your childcare provider from that tax-free childcare account. 

  1. First see if there's other childcare help you can get, incl up to 30 hours free

    Before you start applying for tax-free childcare, make sure you get the help you're entitled to:

    • Free childcare for three and four-year-olds. Every parent in the UK is entitled to free nursery provision. In England, it's 15 hours a week for all, plus an additional 15 hours/week if you earn an average of at least £125/week – the equivalent of at least 16 hours/week on the living wage – while both parents in a couple must work and no one parent can earn £100,000+/year.

      In Scotland, everyone gets 16hrs a week, for Wales it's at least 10hrs a week (up to 30hrs in some parts), while in Northern Ireland it's up to 22.5hrs a week. See how to get free childcare for full details.
       
    • You can get childcare help through universal credit. If you're working and claiming universal credit, you can claim back up to 85% of your childcare costs – but you can't then get tax-free childcare. How much you get depends on your individual circumstances, but as a rough rule of thumb, the maximum for one child is £646 per month, while for two or more children it's a total of  £1,108 per month. See our Universal Credit guide.
  2. Get up to £2,000 per child per year to cover annual childcare costs of up to £10,000

    The  scheme is designed so that for every 80p you put into your tax-free childcare account the state will add 20p – so it effectively gives you basic-rate tax back on what you pay, hence the scheme's name.

    In total you'll be able to use the scheme to help pay for up to £10,000 of childcare per child each year – so you could get an extra £2,000 per child (up to £4,000 if your child is disabled) each year.

    Say your childcare bill was £500/month... you'd pay £400/month with the remaining £100 of the bill picked up by the Government; across the year, this would cut your £6,000 annual costs to £4,800.

    Once your childcare bill exceeds the Government maximum, there's no more financial support. If your childcare bill for one child is £1,000/month, you'd pay £800 and have £200 paid for – after 10 months, once the £2,000 maximum support has been reached, you'll then have to pay full whack.

  3. The scheme is available to ALL eligible workers incl the self-employed

    Tax-free childcare is open to all qualifying parents, unlike childcare vouchers, which can only be used by people who signed up to the scheme before it closed (and only if a workplace offered them). 

    If you work for yourself, you've previously not been able to take advantage of Government schemes to cut the cost of childcare, but the tax-free childcare scheme is open to self-employed people, and anyone else who's working and not getting childcare vouchers, allowing them to take advantage of the 20% tax perk.

    However, if you have a partner, you both need to be in work to qualify – so if you're self-employed and your partner doesn't work, you won't be able to take advantage.

    You can also take advantage of the tax-free childcare scheme if you're a single parent. 

  4. Your child must be 11 or younger

    The scheme's available to parents of children up to and including the age of 11 (or until they turn 17 if you've children with disabilities). This is lower than the 15 years of age limit for kids with the vouchers scheme but the same for children with disabilities.

  5. Both partners in the household must be working & you'll need to earn at least £131/week from April

    To qualify, you (and your partner, if you have one) need to be working and earn a minimum of £125.28/week rising to £131.36/week on 6 April – this is the equivalent of 16 hours/week at the national minimum wage for under-25s or the living wage if you're older. Each parent also needs to earn less than £100,000 a year.

    If you're self-employed and your income varies hugely on a weekly basis, it doesn't matter; as long as your three-monthly average meets the £125.28/week minimum (£131.36/week from April). 

    If you've been self-employed for less than 12 months, the minimum income requirement doesn't apply to you.

    • If you're on paid and unpaid statutory maternity, paternity or adoption leave, it still counts as being in work, so you can still benefit from the scheme as long as you'll be back to work within 31 days. You can't apply for the child that you're on parental leave for, but you can apply for other children you have, so you can still use the scheme for older siblings.

    • Although the rules say both parents need to be in work, you'll still be eligible for a childcare account if you or your partner is in work and the other is not able to and receives any of the following benefits:

      ·         Incapacity benefit or long-term incapacity benefit

      ·         Severe disablement allowance

      ·         Carer's allowance

      ·         Contribution-based employment and support allowance

      ·         National insurance credits (because of incapacity or limited capability for work)

    • Yes, if you're on paid sick leave, it is available.

  6. Check your childcare provider's registered with a regulator such as Ofsted so they're eligible for the scheme

    Childcare could be any breakfast club, nursery, playgroup, nanny, childminder or au pair – the crucial element is that your provider must also be registered with a regulator such as Ofsted, the Early Years Register or the Childcare Register to count as childcare under the scheme.

    However, they must also be registered with the tax-free childcare scheme for you to be able to sign up. It's worth checking with your provider that it is registered, so it's ready for when you can open a tax-free childcare account.

    Your provider will then appear on the Childcare Provider Checker – when you eventually log in to your account you'll be able to see details of all registered providers. If your provider's on there, you'll be able to send payments directly through your account to the provider's bank account via the BACS system.

  7. How the tax-free childcare scheme works

    If you're eligible, here's how it works:

    • Any parent with more than one child will be able to sign up to cover all their children as soon as their youngest child becomes eligible.

    • You'll need to set up an online childcare account via the Government site to use the scheme – and you'll be able to pay money in using your debit card, by setting up a standing order, or by making a payment from your bank account. Only one parent can open the account – though both can, of course, use it – so you'll need to decide in whose name you open it.

      The Government will then top it up with the extra cash the same day. So put in £80 on Monday, and it should be boosted to £100 hours later. However, you must let the funds clear overnight before you can use them to pay for your childcare, which you do by selecting your provider and transferring the money via your tax-free childcare account. Others, such as grandparents or family friends, can also put cash in.

    • You'll be able to spread the cost of childcare, eg, pay in more some months to cover the cost of the extra childcare needed during holiday periods. However, be aware that parents can only get a maximum top-up of £500 every three months - this affects those with higher childcare bills.

      If you have seasonal childcare costs, put money into the account throughout the year, accruing the full top-up as you go. Then, spend it only when you need to – thus avoiding the £500 three-month limit.

    • Every three months, it's also necessary to 'reconfirm' your eligibility. You need to do this using your childcare service account, and simply have to click a box saying your circumstances haven't changed. The Government says you'll be reminded to do this.
       

    • If you've lost out as a result of the technical problems which have previously affected the tax-free childcare website, you can reclaim your costs.

I use vouchers but is tax-free childcare better for me?

Childcare vouchers allow you to pay for childcare from your PRE-TAX salary via salary sacrifice.  From 4 October 2018, no new entrants are able to join the childcare vouchers scheme but if you were signed up for vouchers before the scheme closed, you can continue to get vouchers as long as you stay with the same employer, and it still offers them.

Some people receiving vouchers might be better off claiming tax-free childcare instead. If you're thinking of switching, compare what you'd get with each scheme because you can't go back to vouchers once you've moved to tax-free childcare. 

Whether you'll be better off depends on how much you earn and pay in tax and childcare. Our handy infographic will help determine which scheme’s best for you:

So who are the winners and losers under each scheme?

See where you fall under the tax-free childcare scheme:

Tax-free childcare wins for:

Self-employed people or couples who earn less than £100,000 each, as they're eligible for tax-free childcare, but didn't qualify for childcare vouchers.

Parents with more than one child and high childcare costs, as the help available goes up with the number of children. There's a limit for childcare vouchers which isn't dependent on the number of children.

Childcare vouchers win for:

Couples where one parent doesn't work, as they're not eligible for tax-free childcare unless the non-working partner receives a qualifying benefit, but the employed parent could still be getting childcare vouchers.

Basic-rate taxpayer parents with total childcare costs of £9,336 or less. Under this amount, the saving you make with childcare vouchers exceeds the saving you can make with tax-free childcare.

Higher-rate taxpayer parents with total childcare costs of £6,252 or less. Under this amount, the saving you make with childcare vouchers exceeds the saving you can make with tax-free childcare.

Higher earners, as anyone earning £100,000+ (or in a couple where one earns £100,000+) isn't eligible for the scheme, whereas these high earners can get childcare vouchers.

Here's a couple of quick examples to see how it could work in practice...

  • Olly Onechild and his wife spend £500 of childcare across the MONTH for after-school clubs and pick ups.

    If both are basic-rate taxpayers using vouchers, this would cost them £344 – a saving of £156 compared to not using them.But if they used the new TFC scheme, it'd cost them £400 – £56 more expensive than vouchers.

    If both are higher-rate taxpayers using vouchers, this would cost them £396 – a saving of £104 compared to not using them. And if they used the new TFC scheme, it'd cost them £400 – £4 more expensive than vouchers.

  • Molly Muchcare and her wife have two toddlers and spend £2,000 of childcare (in total for both toddlers) across the MONTH for nursery and pick ups etc.

    If both are basic-rate taxpayers using vouchers, this would cost them £1,844 – a saving of £156 compared to not using them. But if they used the new TFC scheme, it'd cost them £1,668 – £176 cheaper than vouchers.

    If both are higher-rate taxpayers using vouchers, this would cost them £1,896 – a saving of £104 compared to not using them. And if they used the new TFC scheme, it'd cost them £1,668 – £228 cheaper than vouchers.

If you want to break this down even further we've produced a table looking at different family circumstances to see which scheme is the winner. We've examined savings at a level of £10,000 childcare costs per child per year, and assessed who'd win and under which scheme...

  • Childcare vouchers vs tax-free childcare – how much could you have saved in 2018/19? (assumes £10,000 childcare costs/ child)

      CHILDCARE VOUCHERS – THE MAXIMUM TAX & NI SAVING YOU CAN MAKE (1) TAX-FREE CHILDCARE – THE MAXIMUM THE GOVERNMENT WILL CONTRIBUTE
      Assumes you signed up after April 2011 One child Two children (2)
    SINGLE, EMPLOYED PARENT
    No income tax payable None £2,000 (4) £4,000 (4)
    Basic-rate taxpayer £933 (3) £2,000 £4,000
    Higher-rate taxpayer £624 £2,000 £4,000 (5)
    Top-rate taxpayer £620 None None
    SINGLE, SELF-EMPLOYED PARENT
    No income tax payable None £2,000 (4) £4,000 (4)
    Basic-rate taxpayer None £2,000 (4) £4,000 (4)
    Higher-rate taxpayer None £2,000 £4,000 (5)

    Top-rate taxpayer
    None None None
    COUPLE: BOTH EMPLOYED AND ELIGIBLE FOR VOUCHERS
    No income tax payable None £2,000 (4) £4,000 (4)
    Basic-rate taxpayer £1,866 (3) £2,000 £4,000
    Higher-rate taxpayer £1,248 £2,000 £4,000 (5)
    Top-rate taxpayer £1,240 None None
    COUPLE: ONE EMPLOYED, ONE SELF-EMPLOYED
    No income tax payable None £2,000 (4) £4,000 (4)
    Basic-rate taxpayer £933 (3) £2,000 £4,000
    Higher-rate taxpayer £624 £2,000 £4,000 (5)
    Top-rate taxpayer £620 None None
    COUPLE: BOTH SELF-EMPLOYED
    No income tax payable None £2,000 (4) £4,000 (4)
    Basic-rate taxpayer None £2,000 £4,000
    Higher-rate taxpayer None £2,000 £4,000 (5)
    Top-rate taxpayer None None None
    COUPLE: ONE EMPLOYED, ONE NOT WORKING
    No income tax payable None None None
    Basic-rate taxpayer £933 (3) None None
    Higher-rate taxpayer £624 None None
    Top-rate taxpayer £620 None None

    1) The maximum saving doesn't change depending on the number of children you have. Amounts are a MAXIMUM annual gain based on salary sacrifice. (2) Amount increases by £2,000 for each child, there is no maximum. (3) You can only claim vouchers if you earn the national minimum wage, around £13,650 for 35 hours a week if you're over 21. (4) You need to be working, which is classed as earning at least £125.28/week. (5) Assumes earning less than the £100,000 threshold.

    Table uses 2018/19 income tax thresholds: No tax under £11,850. Basic £11,850 to £46,350. Higher £46,350 to £150,000. Top over £150,000.

If your childcare costs are lower than our worked example of £10,000 per child, or you want a personalised assessment, KiddiVouchers (a company providing childcare vouchers) has produced a Tax-Free Childcare Calculator to help you work out which scheme works better for you. Do note that it requires some personal information.

What to do if tax-free childcare is better for you

If you want to move over to the tax-free childcare scheme, you just need to apply. Once you've successfully applied, you'll need to give your employer written notice that you want to permanently leave its voucher scheme This needs to be done within three months. The easiest way to do this is call your voucher provider direct and ask it to stop your membership of the scheme.

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