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Tax Free Childcare

Tax-Free Childcare is a new scheme which is being rolled out gradually from 21 April 2017 and will offer working families 20% support towards qualifying childcare costs up to certain limits. It will eventually replace the directly contracted childcare and childcare vouchers provided by employers under the Employer Supported Childcare Scheme.

1. What is Tax Free Childcare?

Tax-Free Childcare is a new scheme which is being rolled out gradually from 21 April 2017 and will offer working families 20% support towards qualifying childcare costs up to certain limits.  

It will eventually replace the directly contracted childcare and childcare vouchers provided by employers under the Employer Supported Childcare Scheme.

The scheme will eventually be open to almost two million families in the UK and is administered by HM Revenue and Customs (HMRC).

You can qualify if you are employed, self-employed or both as long as you (and your partner if you have one) earn at least £120 a week if you are aged 25 or over.  You will normally qualify if you are in paid work during some periods of sick leave, maternity, paternity, adoption or shared parental leave if you were earning at least £120 a week before you went on leave.

The scheme covers England, Wales, Scotland and Northern Ireland.

 

Reviewed: August 2017

2. How does Tax Free Childcare work?

For every £8 you pay into a Childcare account, the government will pay in £2. It will put in a maximum of £500 every three months for each child - or £1,000 if your child has a disability.

This will operate through an online Childcare account, provided by National Savings & Investments (NS&I) in partnership with HM Revenue and Customs (HMRC), which parents and government can pay money into.

You will pay your childcare costs into this account and the Government will 'top-up' the account with their contribution. Any other person, a grandparent or family member for example, can pay into the account as well.

The money will then be paid directly from this one account to your childcare provider.  Normally, you can only pay for childcare that helps you work or stay in work out of the account.

If your circumstances change or you no longer want to pay into the account, then you’ll be able to withdraw the money you have built up. For any amount you withdraw, the government will withdraw the contribution it has made based on that amount.

The accounts will involve no fees and will allow you to build up credit for use when you need it most, for example during school holidays.

 

Reviewed: Updated: March 2019

3. Can I get Tax Free Childcare?

At the current time, you can only make a claim if:

  • You are responsible for a child who will be under the age of four on 31 August 2017; or
  • You are responsible for a disabled child (until the last day of the week in which the 1st September following their 16th birthday falls.

The scheme will gradually be open to older children over time.  Even if you are eligible to make a claim, you will only qualify if you meet the following conditions.

Eligibility depends on the parents’/guardians’ situation, the child/children and the childcare costs involves.

Eligibility: Parents/guardians

You are usually eligible for a Tax-free Childcare account if all of the following apply.

You and your partner (if you have one ):

  • Are at least 16 years old;
  • Live and work in the UK (Special rules apply if you live or work in another country)
  • Do not receive tax credits or Universal Credit or childcare vouchers. (Child Benefit, child maintenance payments and free childcare for 2-4 year olds are unaffected)
  • Are working - employed or self-employed. If you are part of a couple, both of you must be working
  • Estimate that you earn at least £120 a week each on average over a three-month period unless:
    • You’re under 21 or an apprentice: you must expect to earn the equivalent of 16 hours at the National Minimum Wage rate that applies to you
    • You’re self-employed and recently started a new business and are still in your ‘start-up’ period (usually the first year you start trading as a self-employed person).  If you are self-employed, you may be able to average your income over a 12 month period rather than three months.
  • Neither of you expect to earn more than £100,000 in the current tax year.

You can also apply if you are on leave (sick leave, ordinary or additional maternity, paternity, adoption leave or getting Maternity Allowance, shared parental leave, annual leave) or about to start a new job.

Illness, disability or caring responsibilities

You are eligible for a childcare account if you or your partner is in work and the other gets any of the following benefits:

  • Incapacity Benefit or long-term Incapacity Benefit

  • Severe Disablement Allowance

  • Carer’s Allowance

  • Contribution-based Employment and Support Allowance

  • National Insurance credits because of incapacity or limited capability for work

If you don’t have a partner

If you don’t have a partner, you can still apply to open a Tax-free Childcare account. However, if you are jointly responsible for a child you need to agree who should apply because only one person can open a Tax-free Childcare account for a child.

Eligibility: The child

The child:

  • Usually lives with you even if you are not their parent (but you are not their foster carer)

  • Is under 12 years old (up to last day of the week in which 1st September falls following the child’s 11th birthday) if they don’t have disabilities, or

  • Is under 17 years (up to the last day of the week in which the 1st September falls following the child’s 16th birthday) and:

    • Receives Disability Living Allowance or Personal Independence Payment, or

    • He or she has been certified as severely sight impaired or blind by a consultant ophthalmologist

You can apply for Tax-free Childcare for an adopted child once a court has made an adoption order.

You can’t get Tax-free Childcare for:

  • Your foster child/children

  • Children who are living away from your home for six months or more

  • Children who are in a secure children’s home/training centre or a young offenders’ institution

  • Children who are being looked after by a local authority (even if they are living in your home), unless this is for short-term respite care.

Eligibility: Childcare

You can only use this account to pay childcare costs to help you work. The childcare must be from an approved childcare provider.

Reconfirming your eligibility

You will have to reconfirm your eligibility for these payments every three months.

 

Reviewed: August 2017

4. What if I am in an Employer Supported Childcare scheme?

Tax-free Childcare will eventually replace directly contracted childcare and childcare vouchers.  Workplace nurseries are not affected.  Until April 2018, you can continue to claim childcare vouchers or use directly contracted childcare provided by your employer.  After April 2018, you will no longer be able to make new claims for childcare vouchers or benefit from tax and national insurance savings through directly contracted childcare.

If you are already getting directly contracted childcare or childcare vouchers you can continue to use them after April 2018 if your employer offers them or you can choose to move to the Tax-free Childcare scheme.

You will need to consider which scheme you would be better off in.

This will depend on factors such as:

  • Whether one or both parents is in an ESC scheme

  • The rate of tax you pay

  • How many children you have.

For example; if you are a lone parent with one child and you are receiving the maximum support through an Employer Supported Childcare scheme for a basic rate tax payer, you will be saving a maximum of £933 per year. If you were to join the Tax-free Childcare scheme, you would be saving a maximum of £2,000 per year.

Remember the Tax-free Childcare scheme offers savings per child per year, whereas the Employer Supported Childcare scheme offers savings per parent per year.

Gov.uk has a calculator that can help you decide between the schemes.

We recommend you seek advice from a benefits expert before making a decision. You can use the Turn2us Find an Adviser tool to find a local one.

 

Reviewed: August 2017