In Employment tax, Individuals, Owner managed businesses, Start up

Tax free childcare is a HMRC scheme that offers working families in the UK support toward childcare costs.

What is it?

HMRC will top up every payment of 80p with an extra 20p up to the equivalent of £2,000 per tax year, per child – so up to £500 every three months.  This can increase to £4,000 for children who are registered disabled.

It’s available for children up to the age of 11 (up to the age of 17 for children with disabilities).

Who is eligible?

Unlike the current childcare vouchers scheme (see below) Tax free childcare is available to both employed and self-employed individuals.

In a couple both must work and they must each earn more than £131.36 per week on average. If you are 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.

Newly self-employed parents will not be required to earn the minimum income level for the first 12 months.  A new ‘start up’ period will be available every 5 years.

If one parent earns more than £100,000 per year they will not be eligible.

If one parent is on paid or unpaid Statutory Maternity Pay, Statutory Paternity Pay or Statutory Adoption Pay they will still qualify although you can only claim Taxfree childcare for the newborn in the last 14 days of leave.

How does it work in practice?

You will need to set up a government gateway account with HMRC.

You and others can then start to pay into the account and the Government will pay in their contribution.

The money can be used to pay for childcare at any time as long as the provider has registered with the scheme.

You can withdraw the money at any time but you will lose the Government incentive.

The account holder will need to confirm their eligibility every 3 months and HMRC have said that they will notify the account holder 4 weeks in advance of this.

When can’t I use the scheme?

Even if you meet the criteria mentioned earlier you will not be eligible for the scheme if you are currently claiming Universal Credit, Working Tax Credit, Child Tax Credit or claim childcare vouchers (see below).

Are there any alternatives? 

Childcare vouchers

No new entrants are allowed into the childcare voucher scheme. If you joined before the deadline you can remain in the scheme until you leave your job or the employer closes the scheme

Under the scheme it allows employees to pay for childcare from their pre tax salary which means that they do not need to pay tax and NI on their childcare costs. This represents a saving of 32% for basic rate taxpayers, 42% for higher rate taxpayers and 47% for additional rate taxpayers.

They are only available if the employer offers them.

Childcare vouchers are restricted to £55 per week (up to £930 per year tax saving), per parent if a basic rate tax payer, £28 per week (up to £624 per year tax saving) if a higher rate tax payer and £25 per week (up to £590 tax saving per year) if an additional rate tax payer.

They are available for children up to the age of 15 years (16 if the child is disabled).

There is no minimum or maximum earnings thresholds and only one parent needs to work.

Free childcare

Parents of children in England are currently entitled to 30 hours free childcare for children aged 3-4 years if some conditions are met:

  • In a couple both must work
  • They need to work the equivalent of 16 hours per week and earn more than £131.36 per week
  • No parent can earn more than £100,000 per annum

If you do not meet the above criteria you will still qualify for 15 hours free childcare.

Parents of children in England are currently entitled to 15 hours free childcare for children aged 2 years if they receive certain benefits such as income support, Jobseeker’s Allowance, Universal Credit.

I am currently in a childcare vouchers scheme with my employer, would Tax Free Childcare be better for me?

Generally, Tax Free Childcare is better if you have more children.  You can get £2,000 per child under the Tax Free Childcare Scheme. Childcare vouchers are restricted to a set amount per parent regardless of the number of children you have.

If your childcare costs are high you are also better off with the Tax free childcare. You can get up to £2,000 per child from the Government under the Tax Free Childcare Scheme. The tax saving on Childcare Vouchers is restricted to £930 per parent (if a basic rate tax payer) which is based on maximum childcare vouchers of £55 per week.

Tax Free Childcare is only available for children under 12 whereas the Childcare Vouchers are available up to 15.

Links – HMRC have a website which can tell you more about the schemes available HMRC Childcare Choices


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