Tax-Free Childcare

How it works and how to make the most out of this benefit

The Government's Tax-Free Childcare scheme offers up to £2,000 a year per child towards childcare costs, including nursery, childminder and even some holiday camps. But while 1.3 million families are eligible, around 800,000 aren't currently using this benefit. Read on to find out if you're eligible and how much you could save.

Below we explain how Tax Free Childcare works, but first a quick word from MSE founder Martin Lewis...

Tax Free Childcare is appallingly named, DON'T let it confuse you.

Calling the scheme ‘Tax Free Childcare’ was a political spin to ensure government gets credit for the scheme. Unfortunately the name is appallingly confusing and misleading, and probably partly responsible for the scheme having a much lower take up than it should have. 

In effect this is a discounted childcare savings scheme. Where you save and then pay for childcare with a 25% top up. It's not about tax in anyway – and isn’t linked to the tax rate you pay.  It should change the name to something like “Help for Childcare” or something far better.

Tax-Free Childcare - eight need-to-knows

Find out if Tax-Free Childcare could be right for you...

  1. Tax-Free Childcare is only best if you can't get other state help - so check if you're eligible for free nursery hours or benefits first

    Before you check if Tax-Free Childcare can work for you, you should ALWAYS check what state help you can get. This tends to come in two different ways...

    'Free' nursery hours for three to four year olds - and some younger children too

    If your child's aged three or four you can get up to 30 hours of Government-funded childcare a week. The exact number of hours you get differs depending on your income, whether you (and your partner, if you have one) work, and where in the UK you live.

    Many parents of two-year olds in England will now also get some funded nursery hours too. 

    If your kids are of this age, see childcare costs for full eligibility criteria before you try any other option, as nothing's cheaper than free.

    If you aren't eligible for free childcare hours, or you are but it isn't enough to cover all your childcare needs, you may be able to get further help...

    Universal Credit (or Tax Credits) may cover some of your childcare costs

    Even if you don't think you will have a claim, there's no harm in doing a quick Benefits Check. We've heard from many people in the past who just checked on the off chance and found they were eligible for Universal Credit.

    If you are eligible for Universal Credit, and you're in work, you can claim back up to 85% of the amount you spend on childcare. You can get up to a maximum of £1,014 for one child and £1,739 for two (or more) children.

    Or if you claim Tax Credits, you can get help with up to 70% of your childcare costs (though you can't make a new claim for Tax Credits).

    Warning! Already claiming Universal or Tax Credits? Accessing the Tax-Free Childcare scheme will stop ALL your benefits

    If you get help with childcare costs through either scheme, you WON'T also be able to use Tax-Free Childcare on top. Opening a Tax-Free Childcare account will mean you stop getting paid your benefits (all of it, not just the childcare part).

    If you can get Universal Credit or Tax Credits, it's likely these will give you the most help with your childcare costs. But if you're not sure and think Tax-Free Childcare could be better for you, speak to a benefits adviser – you can get free one-on-one check-ups from Citizens Advice or independent advice centres

    Do that before making a firm decision as this isn't one you want to get wrong, especially if you're reliant on existing benefits to meet the cost of childcare or other living costs.

  2. You can get up to £2,000 per child each year towards childcare costs with Tax-Free Childcare

    The Government-backed 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 short, this is what you can get:

    • Eligible parents can get up to £2,000 per child per year. 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 (or up to £4,000 if your child is disabled) each year.

      You open an online Tax-Free Childcare account using your Government Gateway ID and for every 80p you pay in, the Government will top up your account. 
    • There is a £500 quarterly cap to the government top-up. Parents can only get a maximum Government top-up of £500 every three months – which could impact those with higher childcare bills. 

    Tip: 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 – this will help you avoid the £500 three-month limit.

  3. Tax-free Childcare is open to ALL workers, including the self-employed

    If you're single, you qualify for Tax-Free Childcare if you're in work, including if you're self-employed. If you have a partner, you usually both need to be in work to qualify. But there are some circumstances where you'd be eligible even if you are not working, including:

    • You're on sick leave.
    • You're on annual leave.
    • You're on shared parental, maternity, paternity or adoption leave, and already have a Tax-Free Childcare account for another child.
    • You or your partner is in work and the other isn't able to work and receives certain benefits such as incapacity benefit, carer's allowance or severe disability allowance.
  4. Your child must be 11 or younger (or 16 if your child has a disability)

    The scheme's available to parents of children until the September after their children turn 11 (or until they turn 16 if your child is disabled). 

     

  5. You'll need to earn at least national minimum wage, but £100,000 a year or less

    To qualify, you (and your partner, if you have one) need to be working and:

    • Each earn national minimum wage – To be eligible you'll need to earn the equivalent of 16 hours/week at the national minimum wage for your age group.

    • Each earn £100,000 a year or less. This means if both partners earn £100,000 you can qualify, but if one earns £30,000 and the other £100,001, you won't. However, eligibility is based on your 'adjusted net income' (your total taxable income minus certain tax reliefs, like pension contributions, or charity donations). So, if you pay any tax-deductible expenses, these might take you below the threshold.

    Your partner doesn't have to be the other parent – it's all based on who you live with. So, if you're a single parent but then your new partner moves in, if they don't meet the criteria you'll no longer be able to claim Tax-Free Childcare.

    What if I'm self-employed? 

    Over the next three months you and your partner (if you have one) must each expect to earn at least:

    • £2,379 if you’re aged 21 or over
    • £1,788 if you’re aged 18 to 20
    • £1,331 if you're under 18 or an apprentice

    However, if you've been self-employed for less than 12 months, the minimum income requirement doesn't apply to you, so you'll be able to access the scheme even if your earnings dip below the threshold. 

  6. You can use it for all sorts of childcare – including after-school clubs and holiday activities

    It doesn't matter what sort of childcare you choose as long as your provider is registered with the Tax-Free Childcare scheme, as well as with a regulator such as Ofsted, the Early Years Register or the Childcare Register.

    This means you can also use tax-free childcare for all sorts of holiday activities 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.

    Tax-Free Childcare covers your usual range of registered providers, such as:

    • Breakfast clubs and after school clubs
    • Childminders
    • Nurseries
    • Playgroups
    • Nannies
    • Au-pairs

    If you've a particular provider in mind, it's worth checking that it's registered with the scheme, before opening your Tax-Free Childcare account. 

  7. How it 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 you'll need your national insurance number to hand (if you're self-employed, you'll also need your unique taxpayer reference).

    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.

    • How do I pay in? You'll be able to pay money in by setting up a standing order, or by making a payment from your bank account (using your debit card). Unfortunately, it's not possible to set up a direct debit. Other people, such as grandparents or family friends, can also pay in. 

    • When does the top up appear? The Government should top it up with the extra cash the same day. 

      Recent tweaks to the system mean that the fastest way for money to arrive in your account is via bank transfer. You can still pay in via standing order but the money will show as 'available funds' sooner if you use bank transfer. 

    • How quickly do providers receive the funds? 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 if possible try to plan your payments to avoid missing your childcare provider's deadline.
  8. You MUST reconfirm you're still eligible for Tax-Free Childcare every three months or risk missing out

    One of the key features of the Tax-Free Childcare scheme is that you need to reconfirm that you're eligible four times a year. The process is quick and simple and you'll be given timely reminders when you're due.

    If you don't reconfirm by your deadline, and your childcare bill is due, you'll have to pay the amount in full without the 20% top-up from the state. If you miss the deadline, it is still possible to reconfirm your eligibility, but it can take some time for the system to update, so you might miss out on some top-ups. 

    You can easily check if you're due to reconfirm by logging into your account

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Vouchers vs Tax-Free Childcare: Which is better for you (if you still have the choice)?

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. For details of the scheme, head to our full childcare vouchers guide. 

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 first. You won't be able to 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. The table below shows which scheme is LIKELY best for you.

Tax Free Childcare vs. Childcare Vouchers

Tax Free Childcare wins for...

Parents with more than one child. The help available through Tax-Free Childcare increases with the number of children you have. 
Parents with high childcare costs – usually over £9,500 a year.
People (or couples) who want to become self-employed. You'll be eligible for Tax-Free Childcare if you're self employed (as long as you earn less than £100,000 each).

Childcare Vouchers win for...

Couples where one parent doesn't work, or works less than 16 hours a week.
Basic-rate taxpayer parents with total childcare costs of £9,400 or less (or single parents with childcare costs under £5,000). 
Higher-rate taxpayer parents with total childcare costs of £6,300 or less (or single parents with childcare costs under £3,000). 
People earning £100,000+ a year (or in a couple where one earns £100,000+ a year), as there's no income limit with childcare vouchers.
Parents of older children. You can use the voucher scheme for childcare until your child turns 15

Use the childcare calculator to check your exact circumstances

The table above gives you a rough indication of whether you're likely to better off on Tax-Free Childcare or Childcare Vouchers.

For a personalised assessment, use the Government's childcare calculator to see what help you're entitled to and how much you could get.

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 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, just make sure you check expiry dates with the voucher provider.

What to do if sticking with vouchers is better for you

If you've 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 voucher scheme. But it's vital to know that once you move away from vouchers, you can't go back.

Tax-Free Childcare FAQs

  • Is Tax-Free Childcare available when I'm on parental or adoption leave?

    Yes. You can usually get Tax-Free Childcare if you (and your partner, if you have one) are on shared parental, maternity, paternity or adoption leave and are due back to work within 31 days of the date you first applied.

  • Can we get Tax-Free Childcare if one of us isn't working?

    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)
  • Can I get Tax-Free Childcare if I'm about to start working?

    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. 

  • How do I check if my provider is registered?

    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. 

  • I'm a single parent, do I qualify?

    Yes. Single parents can also use the Tax-Free Childcare scheme. Just bear in mind, your partner doesn't have to be the other parent - it's all based on who you live with, so if you are a single parent but then your new partner decides to move in, if they don't meet the criteria above you would then no longer be able to claim Tax-Free Childcare.

  • A technical issue with the website has cost me money – what can I do?

    If you've lost out as a result of the technical problems that have previously affected the Tax-Free Childcare website, you can reclaim your costs

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