What is Tax-Free Childcare?
Tax-free childcare is a UK Government scheme that gives eligible families 20% off their childcare costs. However, rather than giving families a discount, the government adds 20p for every 80p that a family adds into their childcare account. Eligible families are required to create a free childcare account into which they put money. Childminders/carers are then paid from this account that the government tops up. This allows each family to get up to £2000 per child, per year. Additionally, if a child is disabled, this figure increases to £4000.
Alongside the basic tax-free childcare, you may be eligible to claim childcare help through Universal Credit (UC) or 30 hours of free child care. These will be covered below.
Eligibility
The scheme covers all four UK nations and applies to most families who satisfy the following eligibility requirements. Primarily, to be eligible, you must be working and not claiming tax credits or UC. If you or your partner is claiming one of these, you may be able to claim the childcare elements from the benefits.
Use this link to check what help you can get towards childcare costs.
Working
You are usually eligible if you (and your partner) are at work, on sick or annual leave, or are on parental, paternal, maternal, or adoption leave.
You should also be eligible if you are starting or restarting work within the next 31 days.
If your or your partner is not currently working, you may still be eligible for tax-free childcare where one of you receives one of the following benefits:
- Incapacity Benefit
- Severe Disablement Allowance
- Carer’s Allowance
- Contribution-based Employment and Support Allowance (ESA)
Income
Your income must be over £139.52 per week for the next three months. This should amount to around £1813.76 earned over the next three months. This equates to working 16 hours per week at the National Living Wage. If you have a partner who is also working, they must earn the same amount too.
If you or your partner has an adjusted net income over £100,000, you are not eligible for the scheme.
Child
The child has to be 11 or under and must usually live with you. This runs in line with the school year; therefore, the child will not be eligible from the 1st September after their 11th birthday. Where your child is disabled, they will be eligible until they are 17 and you will receive £4000 per year, as opposed to the normal £2000. To receive this, they must get one of the following:
- Disability Living Allowance
- Personal Independence Payment
- Armed Forces Independence Payment
- Certification as blind or severely impaired
Immigration Status
You are only eligible if you or your partner is from within the European Economic Area (EEA) or you are from outside the EEA, but your residence card allows you to access public funds.
Changes to Tax-Free Childcare Due to COVID-19
If your working pattern has changed because of COVID-19, you may still be eligible for Tax-Free Childcare if you’re temporarily working less and either because you’re:
- On furlough through the Coronavirus Job Retention Scheme
- Claiming a Self Employment Income Support Scheme grant
If you’re a critical worker you may have exceeded the maximum income threshold of £100,000 per year. If this is because of increased hours as a direct result of coronavirus, you’ll still be eligible for 30 hours and Tax-Free Childcare for the current tax year.
What Can You Use the Money For?
The scheme can be used for paying for care outside of school hours but cannot be used for your child’s compulsory education or private tuition, etc during school time.
You can use it for childminders, nannies, or nurseries. Alternatively, it can also be used towards after-school clubs, breakfast clubs, play schemes, or au-pairs. Finally,
But to use it, the provider must be registered with the Tax-free childcare scheme and must be approved. Use this link to check if your intended provider is registered with the scheme. Alternatively, once you open an account, you will be able to see all registered providers. You cannot use it to pay for childcare provided by a relative unless they are an approved provider of such services.
Alternatives to the Tax-Free Childcare Scheme
If you are ineligible for the tax-free childcare scheme or choose not to use it, there are some great alternatives to help with childcare costs. Below are some of the main ones, but more niche ones may be specifically applicable to your circumstances.
30 Hours Free Childcare
This only applies to those living in England as there are different rules for those living in Wales, Scotland, and Northern Ireland.
To be eligible, the childcare must be provided by an approved childcare provider. In England, you are entitled to 30 hours of free childcare per week for 38 weeks a year if your child is between 3 and 4 years old. Where you use less than 30 hours of childcare a week, you may be able to stretch it to 52 weeks – but this is dependent on your childcare provider’s policy.
There are further eligibility requirements that are substantially similar to the eligibility requirements of tax-free childcare. Find more information here.
Free childcare will stop when your child reaches compulsory school age or starts reception class.
As the childcare only covers the period that your child is between 3 and 4, there is a recommended period of time within which you should apply for it. See below for the government recommendation:
Click here to apply.
Universal Credit Childcare Entitlement
Generally, if your annual family income is below £40,000, then you will be eligible for it. You may also be eligible if you earn slightly above £40,000 and your childcare costs are high. You can check whether you are entitled to it, here.
Using the UC childcare element is more cost-effective than applying for tax-free childcare as the UC element can return up to 85% of your childcare costs. This can equate to up to £646 per month for a child. Additionally, the UC childcare element stacks other childcare benefits such as the 30 hours of free child care (see above) and childcare vouchers.
Childcare Vouchers
Tax-free childcare replaced childcare vouchers in October 2018 and is closed to new applicants. But for those that have claimed childcare vouchers before October 2018, can keep claiming them as long as they remain with the same employer.
However, for some, it may be more beneficial to switch over to tax-free childcare. You cannot use both at the same time. See the below chart to see a comparison of the benefits and costs of both:
Overall, there are a few sources of help available to reduce the costs of childcare while you are working. Follow this link to see what help you are eligible for.
If you need help with applying, this video from Her Majesty’s Revenue and Customs (HMRC) will quickly explain how to. Additionally, the government website provides a step-by-step guide to applying for tax-free childcare to make the process easier.
If you need further help, you can contact the Childcare Service Helpline on 0300 123 4097. They are available Monday to Friday 8am to 4pm.
