Using Tax-Free Childcare? Little-known rule means top-ups are limited to £500 every three months

Launched in April, Tax-Free Childcare allows parents and carers in England to open an account to save for childcare costs. For every 80p you deposit, the state adds 20p, up to a value of £2,000 per child per year – see full details in our Childcare Costs Help guide.

However, in what appears to be a major oversight, the taxman did not make clear in guidance accompanying the new scheme that parents can only get a maximum top-up of £500 every three months.

The little-known rule means those who'd banked on being able to use a large chunk of the tax perk early in the year have been unable to access the extra cash they were expecting.

In some cases, parents have been forced to find extra cash for childcare.

Although HMRC's draft guidance – published in October 2014 – mentioned the three-month limit, guidance to parents on the Childcare Choices and Gov.uk websites only referred to the £2,000 limit available each year. Parents have told us the first they heard of the £500 rule was when their accounts could no longer be topped up.

An HMRC spokesperson told MoneySavingExpert: "We are updating our guidance to make it clear that parents will receive a maximum of £500 per quarter in top-up."

'I had no idea there was a £500 limit – now I have to find more of my own money to pay the bill'

MSE Jo discovered the problem when trying to top up the Tax-Free Childcare account she uses to help pay her daughter's childcare bills.

Having applied in April, she recently hit the £500 three-month ceiling after unwittingly trying to claim more than £500 in top-ups. Top-ups are made almost instantly – usually the same day – and once in the account, the rolling three-month time limit begins.

Jo said: "At no stage was it made clear that the £2,000 allowance was divided up into quarters – I had no idea that only £500 was allowed in top-ups for the first three months. With high childcare bills, I'll now need to find the cash elsewhere to meet my bill."

The £500 three-month limit affects those with higher childcare bills more than most.

A Twitter poll run by MSE founder Martin Lewis in March found most parents' childcare bills in a typical month are between £101 and £400. These parents aren't likely to be affected by the three-month rule, as a £1,200 childcare bill over three months would qualify for a £240 top-up – half the maximum allowed.

However, a fifth of respondents said their monthly bills were £801 or more – and those with a monthly bill of £835 or more are likely to be hit by the three-month top-up limit.

In some cases, parents have been forced to find extra cash for childcare

Got seasonal childcare costs? Put money in throughout the year

One of the main groups of parents affected by the three-month limit will be those who have seasonal childcare costs – for example, they may have few bills for much of the year but significant costs over the summer holiday.

Yet there's a way round this which could ensure you get the full up-to-£2,000 top-up, depending on your circumstances. Crucially, the state's extra 20p per 80p you put into the account is added at the point you put money into your Tax-Free Childcare account, not when you spend it.

So if you have seasonal 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.

Technical setbacks

Weeks of technical problems have also dogged the Childcare Service website, through which you apply for Tax-Free Childcare accounts. Last month, MSE revealed how a number of parents had made dozens of unsuccessful attempts to log in, while others have criticised it as "slow" and a "nightmare".HMRC, which runs the site, has apologised for "intermittent issues" and maintenance periods, though it insists most of the technical glitches have now been fixed. Let us know if you're still having problems by emailing news@moneysavingexpert.com.