Tax-Free Childcare: Govt scheme gives you up to £2,000 per child
How it works and how to benefit
The Government's Tax-Free Childcare scheme offers up to £2,000 a year per child towards childcare costs, but only a quarter of the 1.3 million families eligible for the help have signed up. Here's how the scheme works and how to benefit.
Tax-Free Childcare & coronavirus
Your tax-free childcare entitlement (Eng, Sco, Wal and NI) and free nursery hours entitlement (Eng-only) won't be cut if you're temporarily earning less as a result of coronavirus.
To get up to 30 hours of free childcare in England and tax-free childcare across the whole of the UK you'll normally need to earn a minimum income of £140/week. However new rules ensure that if you're temporarily earning less because you've been furloughed or are on the Job Support Scheme then you'll be able to access both schemes based on what you'd normally earn.
Tax-Free Childcare: what you need to know
The Government-backed Tax-Free Childcare scheme essentially gives eligible families 20% off childcare costs. You open an online Tax-Free Childcare account and the Government adds 20p for every 80p you pay in. You then pay your childcare provider from that account.
First see if you even need to pay for childcare – you can get up to 30 hours free
Before you apply for Tax-Free Childcare, make sure you're getting the help you're entitled to.
ALL three to four-year-olds in the UK can get free childcare – see how to get up to 30 hours' free childcare for full details.
In England, each child gets 570 free hours a year (usually taken as 15 hours a week over 38 weeks). Plus, working households are usually entitled to double that as long as you (and your partner if you have one) each earn an average of at least £140 a week – the equivalent of at least 16 hours a week on the living wage from April. Households where a parent earns £100,000+ a year are not eligible.
In Northern Ireland each child gets up to 22.5 hours a week.
In Scotland, every child gets 16 hours a week.
In Wales each child gets at least 10 hours a week and up to 30 hours in some parts.
Family income under £40,000ish? Check if you're entitled to universal credit childcare help
If you're working (or both working, if in a couple) and you pay for childcare, you could claim back up to 85% of your childcare costs through universal credit. Before you even consider Tax-Free Childcare it's worth checking if you're eligible for this help, as it's likely it'll cover more of the cost. However, if you get universal credit, you won't be able to get Tax-Free Childcare.
Who's entitled is complex, but as a rule of thumb, if you've family income under £40,000/year, it's worth taking 10 minutes and using our Universal Credit and Benefits Calculator to check if you're eligible. Some with a higher household income but high childcare costs may even be able to get it too.
How much you can get – and if you're entitled to it at all – depends on your circumstances, but you could get up to £646/month for one child, and up to £1,108/month if you've two or more children.
Yes. You can claim universal credit or tax credits AND get the 30 hours' free childcare at the same time.
You can also use universal credit with childcare vouchers, the scheme which Tax-Free Childcare replaced, but which is still available for some. But you may be better off not using the vouchers at all, as universal credit will likely contribute more to your costs. See our Universal Credit guide for more info.
Tax-Free Childcare gives a boost of up to £2,000 per child each year
The Tax-Free Childcare scheme is designed so that for every 80p you put into your Tax-Free Childcare account, the state will add 20p. It essentially gives you basic-rate tax back on your bill – hence the scheme's name.
In total you can use the scheme to help pay for up to £10,000 of childcare per child each year – giving you an extra £2,000 per child (up to £4,000 if your child is disabled) each year.
Say your childcare bill was £500/mth... you'd pay £400/mth 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.
The scheme is available to ALL eligible workers incl the self-employed
Tax-Free Childcare is open to all qualifying parents. Childcare vouchers 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, as well as 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 use the scheme.
Yes. Single parents can also benefit from Tax-Free Childcare.
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 age limit of 15 for the Childcare Vouchers scheme but it's the same for children with disabilities.
Both partners in the household must be working & you'll need to earn at least £140 a week
To qualify, you (and your partner, if you have one) need to be working and earning a minimum of £140 a week – this is the equivalent of 16 hours/week at the national minimum wage for 25-year-olds or over from April 2020. 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 on average in the next three months or in the whole current tax year you meet the £140 a week minimum.
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 or unpaid statutory maternity, paternity or adoption leave, it still counts as being in work, so you can still benefit from the scheme. 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 isn't able to work 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.
If you're not currently working, but you're due to start or restart work in the next 31 days, you can apply for Tax-Free Childcare.
You can use it for all sorts of childcare – including after-school clubs
No matter what sort of childcare you are choosing – the crucial element is that your provider must be registered with the Tax-Free Childcare scheme as well as with a regulator such as Ofsted, the Early Years Register or the Childcare Register to count as childcare.
So far, more than 68,000 childcare providers have signed up. If you have a particular provider in mind, it's worth checking that it's registered before you open your Tax-Free Childcare account.
Tax-Free Childcare covers your usual range of registered providers, such as:
- Breakfast clubs
Many parents don't realise is that all sorts of holiday activities are included too, such as tennis, football and art clubs – and even some holiday camps.
When you 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.
How the Tax-Free Childcare scheme works & how to sign up
If you're eligible, you'll need to create an online childcare account via the Government Tax-Free Childcare site. It should take about 20 minutes to set up, and to do this you'll need your national insurance number to hand (you'll also need your unique taxpayer reference if you're self-employed).
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.
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.
The Government should top it up with the extra cash the same day. So put in £80 on Monday, and it should be boosted to £100 within hours.
Recent tweaks to the system mean that the fastest way for money to arrive in your account is via bank transfer – approx two hours. You can still pay in using direct debit but the money will show as 'available funds' sooner if you use bank transfer. The Government will then top up your account automatically.
Others, such as grandparents or family friends, can also put cash in.
You can use the money to pay your childcare provider as soon as your account shows 'available funds'. You do this by selecting your provider and transferring the money via your Tax-Free Childcare account.
If you make the payment before 2.30pm then the money should arrive in the provider's account the same day. After 2.30pm, or on a weekend or bank holiday, then the money will arrive in their account on the next working day. However, in some cases it can take up to three working days, so try to plan your payments to avoid these issues.
Parents can only get a maximum Government top-up of £500 every three months – which could impact those with higher childcare bills.
If you have seasonal childcare costs, put money into your 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.
Vouchers vs Tax-Free Childcare: Which is better for me?
The Tax-Free Childcare scheme replaced the Childcare Vouchers scheme, which closed to new applicants in October 2018. If you were signed up for vouchers before the scheme closed, you can continue to get them 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 for childcare – our handy infographic below will help determine which scheme's best for you.
Tax-Free Childcare wins for:
Parents with more than one child and high childcare costs, as the help available goes up with the number of children. The limit for childcare vouchers is per parent and doesn't factor in the number of kids you have.
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.
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, whereas with childcare vouchers only one parent needs to work.
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 Tax-Free Childcare scheme, while there is no income limit with childcare vouchers.
Here are a couple of quick examples to see how it could work in practice...
Olly Onechild and his wife spend £500 on childcare across the MONTH for after-school clubs and pick-ups etc.
If both are basic-rate taxpayers using vouchers, this would cost them £344 – a saving of £156 compared with not using them. But if they used Tax-Free Childcare, 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 with not using them. And if they used Tax-Free Childcare, it'd cost them £400 – £4 more expensive than vouchers.
Molly Muchcare and her wife have two toddlers and spend £2,000 on 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 with not using them. But if they used Tax-Free Childcare, 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 with not using them. And if they used Tax-Free Childcare, it would still cost them £1,668 – £228 cheaper than vouchers.
If you want a personalised assessment, you can use the Government's childcare calculator to see what help you're entitled to and how much you could get.
If you want to break this down even further we've produced this 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 save in 2020/21? (assumes £10,000 childcare costs per child)
CHILDCARE VOUCHERS –MAXIMUM TAX & NI SAVING (1)
TAX-FREE CHILDCARE – MAXIMUM GOVERNMENT CONTRIBUTION
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)
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 Table uses 2019/20 income tax thresholds. (1) The maximum saving doesn't change depending on the no. of children. 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, about £14,924 for 35hrs/week if you're over 21. (4) You need to be working, classed as earning at least £140/week. (5) Assumes earning less than £100,000 threshold.
If you want to move over to the Tax-Free Childcare scheme, you just need to apply. Once you've successfully done so, you'll need to give your employer written notice that you want to leave its voucher scheme permanently. This needs to be done within three months. The easiest way to do this is to call your voucher provider directly to ask it to stop your membership of the scheme.
Once you've left the voucher scheme, you can use stockpiled vouchers alongside Tax-Free Childcare to pay towards your childcare costs. Make sure you check expiry dates with the voucher provider.
If you've gone through the infographic and the comparison table above and have worked out you're better off staying with vouchers, you can continue to get them as long as you stay with the same employer, and it still offers the vouchers.
You can't move to a new employer whose staff are still getting vouchers and continue with them. Once you move away from vouchers, you can't go back.
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