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Tax-free childcare: how does it work?

Updated 21 March 2022

5min read

Kate Morgan
Staff Writer

Parents can now call on the UK government to help pay childcare costs. The new tax-free childcare system, introduced in 2018, means that for every £8 parents pay towards childcare, the government will pay an additional £2.

So why are parents not doing this and are you eligible?

Tax-free childcare: how does it work?

In this article we will cover:

  1. What is tax-free childcare?
  2. Who is eligible for the scheme? 
  3. Can you claim tax-free childcare on maternity leave? 
  4. Can I claim 30 hours of free childcare a week? 
  5. How to apply for tax-free childcare? 
  6. What are tax-free vouchers? 
  7. Take on financial guidance 

What is tax-free childcare? 

In the UK, every child under the age of 11 – or 17 if a child is disabled – can claim an amount of tax-free childcare.

The scheme, which an estimated 1.3 million families are entitled to, allows families to pay for some childcare costs with the government topping up an additional proportion. In practice, this means that for every £8 parents pay, the government will contribute a further £2 up to a maximum of £2,000 per child per year. 

To make a claim for this money, parents need to create a government account and then start paying money in. The government tops up this amount, but doesn’t specify what the money should be spent on, meaning that you could use the money on anything from after school clubs to playgroups to childminders. 

Despite over a million families being eligible for this scheme, only around 316,000 families have made use of it, meaning nearly £3 billion of money set aside for the scheme has been unused.

Critics of the scheme point out that the eligibility criteria and application system are overly complicated, so if you’re struggling to figure out whether or not you should be applying, here’s how it all works.  

Who is eligible for the scheme? 

You can claim tax-free childcare if you earn an average of £142 pounds a week over a three-month period and if you earn a salary of less than £100,000. This calculation is made based on who lives in a registered household, meaning that you don’t need to be living with the other parent to be assessed.

You are still eligible to make a claim if you are self-employed and meet the above criteria. 

If you have an annual family income under £40,000, are working and are paying for your childcare, you may be able to recoup 85% of your childcare costs through Universal Credit. This scheme is separate from tax-free childcare and cannot be claimed at the same time. Depending on your circumstances, you may be better off claiming your money back through Universal Credit.

If both parents are working and earning below £40,000, it would likely be more cost effective to claim childcare costs back via Universal Credit. On the other hand, a parent with a disabled child earning just over £142 a week may find instead opt for the tax-free childcare option, as the longer-term childcare top-up provided by the government until the age of 17 may be more beneficial.  

Can you claim tax-free childcare on maternity leave? 

If you, or your partner, is working, on sick or annual leave or is on maternity leave, you are still eligible to claim tax-free childcare.

Even if you are not currently working, you could still be entitled to childcare support if you receive Incapacity Benefit, Several Disablement Allowance, Carer’s Allowance, or contribution-based Employment and Support Allowance. 

Can I claim 30 hours of free childcare a week? 

There is no typical circumstance and no correct way to go about finding the right childcare support for your needs.

It should also be noted, however, that these two schemes are different again from certain free childcare schemes provided by the local government across the UK. While the final amount will vary from region to region, parents are entitled to anywhere between 10 and 30 hours of free childcare a week for free. 

While tax-free childcare and the Universal Credit scheme both require parents within certain criteria to pay for costs up front, parents may be entitled to as many as 30 hours a week for free – without needing to spend anything. 

How to apply for tax-free childcare? 

You’ll need to apply on the government website for tax-free childcare. First, you’ll need to prove that you are eligible by entering some details about yourself, the other parent if required and your familial income.

Remember that you might be better off using Universal Credit to recoup lots of your childcare costs, so ensure that you’re making the right choice. Consider taking on financial guidance if you can’t make up your mind.  

Once you have applied, you’ll need to make an online account into which both you and the government will pay money. You will then be able to pay childcare providers from this account. You’ll need to reconfirm your details every three months to continue receiving childcare support.  

You will be able to start paying into your account the day it is opened, with the top-up arriving usually on the same day. 

What are tax-free vouchers? 

Tax-free vouchers were one of the main sources of government support to parents facing childcare costs. Closing to new applicants in 2018, these vouchers are slowly being phased out in favour of the new tax-free childcare top-up system. The newer system was implemented to simplify the voucher scheme.  

As a rule of thumb, the benefits of the voucher system and the newer tax-free childcare system are felt differently. Under the previous scheme, families where one parent wasn’t working would most likely have been better off.

As mentioned above, to be eligible for tax-free childcare, you need to be earning £142 a week. Where one parent isn’t working, they may not have qualified. The voucher system, however, would still have offered support.  

On the other hand, the new scheme is far better for supporting parents with more than one child. Under the new programme, child support is tied to the number of children. The government will pay up to £2,000 a year for each child, so for a family of two, an annual limit of £4,000 of childcare will be provided by the government.  

So, between the two systems, the previous voucher scheme benefitted families with fewer children and lower childcare costs, whereas the new system is better suited to larger families with higher costs. 

Take on financial guidance 

The childcare system is frequently criticised for being overly complicated and, though the new system is designed to help families address high childcare costs, not even a third of eligible families are claiming the childcare support from the government that they are entitled to.

Rather than miss out altogether on tax-free childcare support, speak to a financial adviser and take action on your taxes

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About the author
Kate has written for leading publications and blue chip companies over the last 20 years.