How Tax Free Childcare works
Tax Free Childcare works through an online childcare account that you open and pay into. For every £8 you pay in, the government adds £2. That is a 25 percent top up on what you contribute, which is the same as the basic rate of tax being refunded on the cost, hence the name.
The top up is capped. The government adds up to £2,000 per child each year, which means you can receive the full top up on up to eight thousand pounds of your own contributions per child per year. If the child is disabled, the cap is higher at £4,000 per child each year. The money in the account can only be paid to childcare providers who are registered with the scheme, such as nurseries, childminders, after school clubs and holiday clubs.
Who qualifies
To use Tax Free Childcare, both parents usually need to be working and each earning at least a minimum amount, although there are exceptions for parents who are unable to work, for example because they are receiving certain benefits. A single parent who is working can also qualify. The scheme is aimed at working families, so being in paid work, including self employment, is central to eligibility.
There is also an important income ceiling. Neither parent can have income over £100,000. If either parent goes over that limit, the family loses access to the scheme, even if the other parent earns very little. This makes the £100,000 line a sharp cliff edge rather than a gentle taper, so it is worth watching carefully if your income is close to it. Managing income around this limit is something we cover in tax planning.
A worked example
One child in nursery
Sam and Jordan both work and neither earns over £100,000. Their nursery costs £800 a month for their one child. They decide to pay their childcare through a Tax Free Childcare account. To cover the £800 bill, they pay in £640 of their own money, and the government adds £160 as the top up. Over a full year that is £1,920 of government top up, just under the £2,000 annual cap for the child. The £1,920 is money they would otherwise have paid themselves, so it is a meaningful saving on a cost they were always going to face.
If their childcare bill were higher, they would still only receive top up on contributions up to the cap, so the maximum boost for one child in a year is £2,000 regardless of how high the bill goes.
How it interacts with other support
Tax Free Childcare cannot be used at the same time as some other forms of childcare support. In particular, it generally cannot be combined with certain benefit based childcare help or with employer childcare voucher schemes for the same period. Which option is better depends on your income, your childcare costs and the support you currently receive, so it is worth comparing carefully before you switch.
Families should also keep an eye on other thresholds that affect them. For example, the High Income Child Benefit Charge uses a different income measure and a different set of thresholds, so it is possible to be affected by one and not the other. Looking at the whole picture together usually gives the best result.
How to keep your account valid
Tax Free Childcare accounts have to be reconfirmed regularly, normally every three months, to show you still meet the conditions. If you forget to reconfirm, the top up can stop, so it pays to keep on top of the renewal reminders. You also need to make sure your chosen provider is signed up to receive payments through the scheme.
If you are self employed, your eligibility is based on your earnings, and the rules can be more nuanced in your first year of trading. If your income is reported through Self Assessment, it helps to keep your figures accurate and up to date so you can show you meet the conditions. If you would like help reviewing whether the scheme suits your family, you can start your quote.
A plain English guide to Tax Free Childcare, the government top up, who qualifies and the income limits that apply.
Frequently asked questions
How much does the government add?
For every £8 you pay into your childcare account, the government adds £2. This is capped at £2,000 per child each year, or £4,000 per child each year if the child is disabled.
Can I use Tax Free Childcare if I earn over £100,000?
No. Neither parent can have income over £100,000. If either parent exceeds that limit, the family is not eligible, even if the other parent earns very little.
Can I use it alongside childcare vouchers or benefit based help?
Not at the same time. Tax Free Childcare cannot be combined with some other forms of childcare support, such as certain benefit based help or employer voucher schemes, for the same period. You usually have to choose which works best for you.
Does the self employed qualify?
Yes, self employment counts as working for the purposes of the scheme, provided you meet the minimum earnings condition. There can be some flexibility in your first year of trading, but the income limits still apply.
What can I spend the account on?
The balance, including the government top up, can only be paid to childcare providers registered with the scheme, such as nurseries, childminders, after school clubs and holiday clubs.
Do I have to do anything to keep it going?
Yes. You normally need to reconfirm your eligibility every three months. If you do not reconfirm, the top up can stop, so keep an eye on your reminders.