Tax-Free Childcare: Eligibility and how does it work?

Families can use Tax-Free Childcare to reduce the amount they have to spend on childcare, up to more than £2,000 a year per child. For those who are eligible for the scheme, the government pays 20 per cent of your childcare costs up to a set amount.

The Tax-Free Childcare scheme was initially rolled out in 2017 and replaced Childcare Vouchers for new applicants in October 2018.

‘It’s effectively a discounted childcare saving scheme’

The Money Saving Expert Martin Lewis estimates that as many as 800,000 parents are not taking advantage of the Tax-Free Childcare scheme. This is despite the scheme providing them with up to £2,000 to help with childcare costs and up to £4,000 to pay for childcare if your child is disabled.

On his Money Saving Expert (MSE) website, he says: “It’s not about tax in anyway, and isn’t linked to the tax rate you pay. A better name would be ‘Working Families Childcare Top-up’. It is effectively a discounted childcare savings scheme where you save and then pay for childcare with a 25% top-up.”

The video below explains how Tax-Free Childcare works.

How does Tax-Free Childcare work?

If you are eligible for the scheme, you set up an online account for your child which you use to pay the childcare provider. For every £8 you put into the account, the government adds another £2. You can get up to £500 every three months for each child, or £1,000 if your child has a disability.

The scheme is available across the UK in England, Scotland, Wales and Northern Ireland.

Not everyone is eligible. It depends on if you are working, your income as well as your child’s age and circumstances. For example, your child must be 11 or under and live with you most of the time. If your child has a disability, you could get Tax-Free Childcare until they turn 17 years old.

How much can you get?

If you are eligible, you can get up to £500 every three months up to a maximum of £2,000 for each child per year. This amount goes up to £1,000 every three months for a child who is disabled, meaning you could get up to £4,000 a year.

To receive the maximum amount of £2,000, parents would have to spend at least £10,000 a year on childcare costs.

Tax-Free Childcare allows families to save considerably on their childcare costs. For example, a part-time (25 hours) day nursery place for a child under two is on average £7,700 a year in the UK.

However, even if you get Tax-Free Childcare, you can still get 30 hours free childcare if you qualify for both.

To calculate how much you will get, add 20 per cent on top of what you pay into the account. For example:

If you pay £500 into the Tax-Free Childcare account, the government will add another £125 into the account. The amount payable to your provider will then be £625.

Eligibility – who qualifies for Tax-Free Childcare?

There are a number of requirements you need to fulfil to qualify for the scheme. They include:

• Employment
• Your income (and your partner’s if applicable)
• How old your child is and what their circumstances are
• Immigration status

Tax-Free Childcare if you are working

You will usually get Tax-Free Childcare if you (and your partner) are in work, whether you are self-employed or not. If you have a partner, both of you must work to be eligible.

To be eligible, you should expect to earn at least the National Minimum Wage or Living Wage for 16 hours a week on average. This applies to both partners.

From April 2024, the National Minimum Wage increased to £11.44 for anyone aged 21 and over, £8.60 for 18-20 year olds, and £6.40 for 16-17 year olds and apprentices.

If you are self-employed and unsure of how much you will earn in the next three months, you can calculate the average amount you expect to earn in the current tax year.

There is a limit, however. If you or your partner earn £100,000 or more, you will not be eligible.

Tax-Free Childcare if you are unemployed 

If you are currently out of work but your partner is employed, you may still qualify if you receive Incapacity Benefit, Severe Disablement Allowance, Carer’s Allowance or contribution-based Employment and Support Allowance.

You may also apply if you are starting work within the next 31 days.

Eligibility of your child 

Your child must be 11 years old or younger to qualify for Tax-Free Childcare. The scheme is available until your child turns 17 if they have a disability.

If your child gets Disability Living Allowance, Personal Independence Payment, Armed forces Independence Payment or is certified as blind or severely sight-impaired, you may get up to £4,000 a year.

What can you use Tax-Free childcare for?

If you are eligible, you can use the extra funds to pay for any kind of approved childcare. This means that your provider must be registered with its country’s regulatory body, such as Ofsted in England.

The provider must also be signed up to the scheme, so make sure to check with your provider.

You can use Tax-Free Childcare to pay for:

• Nurseries
• Childminders
• Nannies
• After school clubs
• Play schemes

How to claim Tax-Free Childcare

To apply, you will need your own and your partner’s details, such as National Insurance Number or Unique Taxpayer Reference (UTR) if you are self-employed.

Apply for tax-free childcare through the Government website.

If approved, you will receive details for your childcare account, which you can then log into and add your childcare provider to as a payee.

When you put money into your childcare account, which you do through online banking as a transfer, the amount you’ve put in will immediately top up with the Government’s contribution.

You then pay your childcare provider from this account.

Remember that you need to reconfirm your details every three months; you can do this by logging into your tax-freechildcare account.