A Guide To Tax-free Childcare

Many parents wish to put their child in nursery to ensure they are gaining vital early childhood education, developing in a nurturing environment, and being cared for by reliable caregivers whilst they focus on other important responsibilities.

Though parents seek the peace of mind that nursery provides them while they work, it may come with concerns or questions about costs.

What some don’t know is that 1.3 million families in the UK are eligible for the Tax-Free Childcare scheme (which offers up to £2,000 a year, per child, towards childcare costs). Around 800,000 are not currently using this benefit.

With tax-free childcare available from the government, you can make your money stretch further whilst providing your children with the best possible childcare.

Tax-Free Childcare in the UK Explained

Tax-Free Childcare is a scheme around which there can be some confusion, as it isn’t actually about tax at all. Essentially, it’s a top-up scheme to help working families pay for childcare with a boost from the government (to the cap limit).

Who is eligible for Tax-Free Childcare?

• The scheme is available to all parents who work (including the self-employed) and have children aged 0-11 years (or up to 17 years if disabled).
• If you’re a single parent and work, you will qualify. If you have a partner, they will usually also need to be in work to be eligible for tax-free childcare.
• It is for parents who aren’t receiving Tax Credits, Universal Credit or childcare vouchers, however, eligible parents can use both Tax-Free Childcare and 30 hours funded childcare together to support their childcare costs.
• To qualify, parents must be in work and need to earn at least national minimum wage, but less than £100,000 a year. If you’re self-employed, you’ll qualify as long you earn at least £152 a week on average over the next three months.
• If you are self-employed and in your first 12-months of self-employment, the minimum income threshold does not apply.

It’s important to note that if you are already claiming Universal Credit or Tax Credits for help with childcare costs, claiming Tax-Free Childcare will stop your other benefits.

Most parents who are eligible for Tax Credits or Universal Credit will save more money with the childcare elements of these benefits, rather than using the Tax-Free Childcare scheme.

Find out more about funded childcare, which can be accessed alongside Tax-Free Childcare for eligible parents.

Other eligibility criteria for Tax-Free Childcare

In some limited circumstances, you might be eligible for Tax-Free Childcare even if you are not currently working. These include:

• If you are on sick leave from your normal job
• If you are on annual leave from your usual job
• If you are on maternity, paternity, adoption or shared parental leave and already have a tax-free childcare account for another child
• If one partner works but the other is unable to and is in receipt of specific benefits, such as incapacity benefit, carer’s allowance or severe disability allowance

How does Tax-Free Childcare actually work?

The scheme was launched in April 2017 and is the main option for parents who are in work. It replaced childcare vouchers for new applicants in October 2018.

• You need to create an online childcare account via the Government Tax-Free Childcare site. Only one parent can open the account – though both can use it.
• One of the key features of the Tax-Free Childcare scheme is that you need to reconfirm that you’re eligible at the end of each entitlement period, for your tax-free childcare to continue into the next period. The entitlement period is usually three months, but HMRC can alter the length period by up to two months.
• Parents can pay money into the account as and when they like, with flexibility to pay in more or less per month, and the ability to withdraw money from the account if you need to.
• The money in the Tax-Free Childcare account, including the government top-up, can be used for after-school clubs and holiday activities, as long as the provider is registered with the Tax-Free Childcare scheme and is regulated by Ofsted, the Childcare Register or the Early Years Register. It can also be used for the typical range of registered providers, including:
  • Breakfast clubs
  • After-school clubs
  • Nurseries
  • Playgroups
  • Nannies
  • Au-pairs
  • Childminders

How much do I get with Tax-Free Childcare?

• For every 80p you put into your Tax-Free Childcare account, the state will add 20p. Eligible parents can get up to £2,000 per child per year, as there is a cap of £500 per quarter for the government top-up.
• As an example: If your childcare bill was £500/month, you’d multiply 500 x 0.8 to get £400. You’d put £400 into your Tax-Free Childcare account and the remaining £100 (20%) will then be topped up by the Government.
• You can use this tax-free childcare calculator to find out how much you could get towards approved childcare.
• If your childcare costs change seasonally e.g. due to extra childcare being needed outside of term times, it’s best to add money to your Tax-Free Childcare account throughout the year so you get the maximum available top-up as you go, rather than missing out on some of it in during periods when your childcare costs are lower.

Paying your nursery fees using the Tax-Free Childcare scheme

At Kids Planet, we accept payments via the Tax-Free Childcare government scheme, if you are using this method of payment, please can you ensure that we receive your payment for the 1^st of each month.

You will be provided with a Tax-Free Childcare reference when you register, please use this reference when sending in your payments. You can find further details of how to apply for Tax-Free Childcare at www.childcarechoices.gov.uk.

FAQs on Tax-Free Childcare Rules

We’ve compiled answers to some common questions about Tax-Free Childcare.

Do parents need to start work before applying for Tax-Free Childcare?

If you are due to start a job or return to work in the next 31 days, you can open a Tax-Free Childcare account online and apply for Tax-Free Childcare as long as you are eligible once you are working again.

Do parents on maternity, shared parental or adoption leave qualify for Tax-Free Childcare?

If you have an older child then you can start or continue with a Tax-Free Childcare claim for them whilst on maternity, shared parental or adoption leave, but you can’t claim for the child that you are on leave to take care of.

You may be eligible to start a claim for the child whose birth or adoption led to the time off work in the final 31 days of the leave.

What happens if I become ineligible for Tax-Free Childcare?

If your circumstances change and you are no longer eligible for Tax-Free Childcare, you must amend your details. You will be able to take out any money in your account, which will remain open for two years. You can use any money still in the account, including any top-up payments that came in while you were still eligible, to pay for childcare after you stopped being eligible. However, withdrawing the money means that you can only take out what you paid in, and any top-ups will be returned to HMRC.

Should I change from Childcare Vouchers to Tax-Free Childcare?

If you already receive Childcare Vouchers through a scheme with your employer, you can’t also claim Tax-Free Childcare, so it’s important to work out which scheme works best for your circumstances. The maximum top-up through Tax-Free Childcare is £2,000 a year, per child. So, if the Childcare Voucher scheme you are currently on provides you with more than this, it makes sense to stick with the vouchers.