What is Tax-Free Childcare?

Paying for childcare can be one of the most significant household expenses – sometimes running into thousands of pounds a month if you have one or more children requiring full time nursery care or wrap around supervision at school.

What is Tax-Free Childcare?

Tax-Free Childcare is a tax efficient way of helping towards the cost of childcare. 

For every £10 you spend on childcare the Government will top up your account with £2.50 – this is equivalent to the basic rate of tax (20%) and gives the scheme its name, Tax-Free Childcare. The full £12.50 is then sent across to your childcare provider.

Example:

If your monthly childcare bill was £300 and you were to use Tax-Free Childcare, you would pay £240 into your online account. The Government would then top up your account with £60 and the full £300 would be sent across to your childcare provider.

This represents a monthly saving of £60 or £720 a year.

You can get up to £500 every 3 months (totalling £2,000 per year) for each of your children to help towards the cost of their childcare; this allowance increases to £1,000 every 3 months if a child is disabled (a total of £4,000 per year

You can use Tax-Free Childcare to pay for approved childcare given by:

  • Childminders
  • Nurseries
  • Nannies
  • After school/holiday clubs
  • Playschemes

Can I apply?

Eligibility depends upon the following:

  • If you are working
  • Your income (and your partner’s income, if you have one)
  • Your child’s age and circumstances
  • Your immigration status

You can usually receive Tax-Free Childcare if you (and your partner if you have one) are working, on sick leave or annual leave or on shared parental, maternity, paternity or adoption leave (certain restrictions apply if you are on adoption leave)

You may still be eligible if your partner is working and you receive Incapacity Benefit, Severe Disablement Allowance, Carer’s Allowance or contribution based Employment and Support Allowance.

How much do I need to be earning?

You will need to expect to be earning a certain amount over the next 3 months.  This is at least the National Minimum Wage or Living Wage for 16 hours a week on average.  For example, earnings of at least £1,813.76 – the National Living Wage for people over 25.

I’m Self Employed, can I apply?

If you’re self employed and do not expect to make enough profit in the next 3 months, you can use an average of how much you expect to make over the current tax year.  The earnings limit above does not apply if you’re self employed and started your business less than 12 months ago. 

If you or your partner have an expected ‘adjusted net income’ over £100,000 in the current tax year you will not be eligible. This includes any bonuses you expect to receive.  Your adjusted net income is your total taxable income before any personal allowances and minus things like Gift Aid.

How do I apply?

You will need to apply online. The process takes around 20 minutes and you will need:

  • Your details and your partners if it is a joint application
  • National Insurance Number
  • Unique Tax Payer Reference (UTR), if you are self employed

To access this service for the first time you will need to set up a Government Gateway account which can be set up at the same time as the application process. You may need additional information such as your UK Passport, tax credits, P60 or a recent payslip.

As part of your application you will find out if you are eligible and if you live in England, you will also find out if you are eligible for 30 hours free childcare which may take up to 7 days.

Read more in our fact sheet

For more information on tax-free savings options, please get in touch with our team on 01903 534587.