Tax-Free Childcare: All You Need to Know

22 August 2023

The Government offers a variety of tax schemes for families, but one of its lesser known is the Tax-Free Childcare Scheme. If you’re eligible, the Government will pay 20% of your childcare costs, up to £2,000 per child, per year (or £4,000 if your child has a disability). You can even use Tax-Free Childcare to pay for summer holiday clubs.

Read on to find out all the essentials on Tax-Free Childcare, including how it works, how to find out if you’re eligible, and more.

WHAT IS TAX-FREE CHILDCARE?

Tax-Free Childcare is a Government scheme that offers up to £500 every three months (£2,000 a year) for each of your children aged 11 or under. If your child is disabled, you may get up to £1,000 every three months (£4,000 a year) until they are 16 years old.

To apply for Tax-Free Childcare, you need to open a Tax-Free Childcare account online. If successful, the Government will pay in £2 for every £8 you contribute to your account.

Useful Tip: If you want to find out how much you might be entitled to, stick your details in the Government’s childcare calculator.

 

HOW DOES TAX-FREE CHILDCARE WORK?

When you apply, you’ll need your national insurance number and unique taxpayer reference (UTR). The process takes around 20 minutes and only one parent can open an account.

You can pay into an account via a standing order or with a debit card – but you can’t set up a direct debit. Grandparents can pay in too, as can close friends.

Once you’ve paid in, you can expect the Government to top it up the same day. And you can pay your childcare provider as soon as the account displays ‘available funds’. Simply select your provider and transfer the money.

Payments made before 2.30pm should arrive in the provider’s account that same day. Make a payment after that time, or on a weekend/bank holiday, and it’ll arrive the next working day.

However, sometimes payments can take three working days, so try and plan ahead to avoid missing deadlines.

WHO IS TAX-FREE CHILDCARE FOR?

To qualify for Tax-Free Childcare, you (and your partner, if you have one) need to be working and:

  • Each earn national minimum wage – at the equivalent of 16 hours/week at the national minimum wage for your age group.
  • Each earn £100,000 a year or less – if both partners earn £1,000 you qualify. But if one earns £30,000 and the other £100,001, you won’t qualify.

Your partner doesn’t have to be the other parent, it’s based on who you live with.

If you’re self-employed, over the next three months you and your partner (if you have one) must expect to earn at least:

  • £2,167 if you’re aged 23 or over.
  • £2,117 if you’re aged 21 or 22.
  • £1,557 if you’re aged 18 to 20.

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

WHAT CAN TAX-FREE CHILDCARE BE USED FOR?

Tax-Free Childcare can be used to pay for childcare that is approved by the Government, which can include:

  • Breakfast clubs
  • After-school clubs
  • Play schemes
  • Childminders
  • Holiday camps
  • Sport and art clubs
  • Nurseries
  • Nannies
  • Au-pairs.

However, the childcare provider you use needs to be signed up to the scheme before you can pay them and take advantage of Tax-Free Childcare.

WHAT OTHER CHILDCARE COST HELP CAN I USE ALONGSIDE TAX-FREE CHILDCARE?

Although you can claim for 30 hours free childcare at the same time as Tax-Free Childcare, you can’t use the scheme at the same time as:

  • Universal Credit
  • Tax Credits (including Working Tax Credit and Child Tax Credit)
  • Childcare Vouchers – although this scheme closed to new applicants in October 2018, you can still receive the vouchers if you signed up before then, are with the same employer, and they still offer them. If you do get these vouchers, it’s worth comparing what you’d get with each scheme, before deciding whether to keep them or sign up for Tax-Free Childcare.

If you sign up for Tax-Free Childcare, bear in mind that any Tax Credits or Universal Credit you receive will be terminated and you’ll remain ineligible for as long as you’re a member of the scheme.

For help with your tax matters, don’t hesitate to contact our Tax Advisory team on 0333 060 9827.

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