Tax-Free Childcare

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

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.

Here we explain what the scheme is, how it works 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, so this guide has been left largely as it was.

In this guide

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

Tax-free childcare is a Government-backed scheme which helps parents with the cost of childcare. The scheme, which launched in April 2017, gives eligible families an extra 20% towards childcare costs but not everybody will be able to take advantage straightaway. Here's what you need to know so far...

  1. First grab 15 hours' free childcare (or 30 hours if eligible in England) and check if you're due tax credits

    Before you start applying, make sure you get the benefits you're entitled to:

    • Free childcare for three and four-year-olds. Every parent in England is entitled to 15 hours' free nursery provision per week – your provider fills in local authority paperwork with you – across 38 weeks a year, but from September 2017 this doubled to 30 hours (in England).

      However, to be eligible for the additional 15 hours/week you need to work the equivalent of 16 hours/week at national minimum and living wage (currently £125.28/week; while both in a couple must work) and no one parent can earn £100,000+/year. See full info (including for the rest of the UK).
       

    • Are you eligible for childcare tax credits, typically worth £3,000/year? If you pay for childcare, work 16+ hours a week (couples must both work) and have a sub-£46,000 family income you could be entitled - if you live in an area where universal credit hasn't been rolled out.

      There's no guarantee but it'll be worth checking to see if you are. Full help in Childcare Tax Credits. If you get them, they're usually a winner ahead of what's below. 

      Warning: It's important to note, you won't be able to get the childcare tax credit – or childcare element of working tax credit to give it its full name – or universal credit if you're signed up to the new tax-free childcare scheme.

  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 in, 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 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. Say 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.

    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 not getting childcare vouchers, and allows 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 slightly lower than the 15 years of age limit for kids with the vouchers scheme but the same for children with disabilities.

  5. Both parents or partners in the household must be working & you'll need to earn at least £125.28/week

    To qualify, you (and your partner, if you have one) need to be working and earn a minimum of the equivalent of 16 hours/week at the national living or minimum wage (currently £125.28/week if you're over 25).

    You can work less than 16 hours/week as long as your weekly income is more than the £125.28/week minimum. If you're self-employed and your income varies hugely on a weekly basis – eg, £50 one week, nothing the next, then £500, then £750 – it won't matter; as long as your three-monthly average meets the £125.28/week minimum, you'll be eligible.

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

    You also need to earn less than £100,000 a year – this applies to both, so if one earns more then, as a couple, you can't access tax-free childcare. It will also be available to parents on paid sick leave.

    If you're on paid and unpaid statutory maternity, paternity and 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.

    What about illness, disability or any caring responsibilities I may have?

    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)

  6. How the tax-free childcare scheme works

    The roll-out of tax-free childcare happened in stages with parents of the youngest children eligible first. With the roll-out now complete, the scheme is open for any parents with children aged 11 or under.

    Here's what you need to know:

    • 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 Childcare Choices to use the scheme – and you'll be able to transfer money in from your bank as you would any other 'savings' 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. Others, such as grandparents or family friends, can also put cash in.
       

    • You'll be able to spread the cost of childcare, ie, pay in more some months, for example, 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 in a message, four weeks before each reconfirmation deadline.
       

    • Many parents have been in touch with us to tell of difficulties logging on to the Government website, a problem we first highlighted in May.

      While thousands of parents have struggled to sign up, leaving some in great difficulty to meet bills, it's now emerged that if you've lost out as a result of the technical problems which have plagued the new tax-free childcare website, you can now reclaim your costs.

  7. Check to make sure your childcare provider's registered with a regulator such as Ofsted so they'll be eligible for the new 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 new tax-free childcare scheme for you to be able to sign up. It's worth checking with your provider that it is registered or in the process of registering now, 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.

Which scheme is better for you – vouchers or tax-free childcare?

Childcare vouchers allow you to pay for childcare from your PRE-TAX salary.

From 4 October 2018, no new entrants are able to join the childcare vouchers scheme (see our full guide for more information on how childcare vouchers work). This information is left in this guide for those who are still using vouchers but are considering switching to tax-free childcare.

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 the vouchers.

Some people who are currently receiving childcare vouchers might be better off claiming tax-free childcare instead. If you're thinking of switching, it's important you see how much you'd get which each scheme before switching, as you can't go back to vouchers once you've moved over to tax-free childcare.

Whether you'll be better off depends on how much you earn, how much tax you pay, and how much you pay for childcare. Here's our handy infographic to help determine which scheme is 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...

Example 1. Low childcare user
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.

Example 2. High childcare user
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 can you save? (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

What to do depends on whether you're already signed up to childcare vouchers, or you're only planning to sign up.

I'm already signed up to get childcare vouchers

If you're already signed up to the childcare vouchers scheme with your employer, then you can continue claiming them until your employer stops offering them, or you change jobs.

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.

How each company scheme deals with this may vary hugely – feedback so far has been limited. Some firms may not have anticipated demand to leave the voucher scheme, with staff struggling to be helpful. Others don't appear to have a clear voucher refund policy for those who bulk bought in advance but now want to switch to the Government alternative.

I'm not signed up to any scheme

It'll simply be a case of making sure you sign up to the new Tax-Free Childcare scheme.

What to do if childcare vouchers are better for you

If you're already signed up, you don't need to do anything. You can continue claiming them until your employer stops offering them, or you change jobs.

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