How Does Tax Free Childcare Work? All Your Questions Answered

Everything you need to know about navigating this tricky system...

Nursery School

by Alice Hall |
Updated on

It's no secret that the cost of childcare is catastrophic for many working parents. In a major 2021 survey, ninety-two per cent of parents said that childcare costs had affected their standard of living, with 50 per cent describing them as 'completely unaffordable' or having resulted in a substantial impact to their lives. This is something we addressed in the Grazia x Pregnant Then Screwed campaign, which led to a commitment by the Education Select Committee to review the childcare sector.

One form of help on offer is the government's Tax-Free Childcare scheme, which launched in 2017. The scheme offers up to £2,000 a year to help with the cost of childcare, including childminders, nurseries, nannies and after school clubs. It is estimated that 1.3 million families are eligible for the scheme - but just 36%, or 470,000 families, claimed it in June last year, according to data from HM Revenue and Customs (HMRC). Last year, chancellor Jeremy Hunt introduced 30 hours of free childcare for children from the age of nine months to be available from September 2025.

Labour aren't the first to criticise the scheme. Earlier this year, Money Saving Expert Martin Lewis took to X to share his thoughts on the Tax-Free Childcare scheme. He wrote 'Just writing about Tax Free Childcare, so many miss out, not helped by the appalling, confusing, misleading name. It gives an effective 25% discount to those eligible who save then pay for childcare. It's not about tax, that over-complicates what is a savings account. Time to rename it eg Help for Childcare savings or something. Thoughts?'

'Many families just aren’t aware of the scheme. It is not widely publicised and the name can be misleading,' says Mandy Jackson, Rights Adviser at Working Families. 'It can be a tricky system to navigate and requires ongoing admin as you’re required to reconfirm your eligibility every three months. Plus, the amount of money has not increased since the scheme was introduced in 2017, despite other costs going up.'

From eligibility criteria to application deadlines, we've broken down everything you need to know about Tax-Free Childcare...

How does Tax-Free Childcare work?

Tax-Free Childcare is a scheme by the government, which offers up to £2,000 a year, or £4,000 for those with disabled children, to help with the cost of childcare, including childminders, nurseries, nannies and after school clubs. This works through an online childcare you set up for your child. For every £8 you pay into this account, the government will pay £2.

The government website states that your childcare provider needs to be signed up to the scheme before you can pay them and benefit from Tax-Free Childcare. You should check with your provider to see if they are signed up.

'We would recommend that everyone who is eligible ensure they are registered for Tax-Free Childcare as it gives you a discount on your childcare costs, but don’t be fooled by the name of it. It is not tax free, but a discount on your costs capped at £500 per quarter,' says Joeli Brearley, CEO and Founder of Pregnant Then Screwed. 'Unfortunately that discount has not increased since the scheme was first announced, despite the cost of childcare increasing faster than inflation.'

Who is eligible for Tax-Free Childcare?

Tax-Free Childcare is available to parents in the UK who are working and have a child who is age 11 or under (or a disabled child age 16 or under). They must not be receiving any support through Tax Credits or Universal Credit.

'Usually, both parents in a couple must work on an employed or self-employed basis and have an income of at least £2,379 (calculated from April 2024) each, every three months,' says Jackson. She adds that periods on maternity leave, sick leave, paternity leave, parental leave, adoption leave, and shared parental leave will count as being in work, but 'eligibility is limited to the last 31 days of leave where parents are claiming for a child whose birth or adoption led to the time off.'

Parents of disabled children who are unable to work may still be eligible for the Tax-Free Childcare scheme. 'To be eligible, the household must have one child under the age of 12, or a child with a disability under the age of 17. Eligibility is according to the school year – so that disabled children will be eligible until the September after their 16th birthday, while other children will be eligible until the September after their 11th birthday,' says Jackson.

You can work out the amount the government will contribute towards your childcare using the Tax-Free Childcare calculator.

What other state benefits are available?

'If you are eligible for Universal Credit or Tax Credits, you’re more likely to be able to save money using the childcare elements of these benefits instead of using Tax-Free Childcare,' says Jackson.

Before checking if Tax-Free Childcare can work for you, it's worth checking what other state benefits you can get. These include:

Free nursery hours for three to four year olds

All 3 and 4-year olds are entitled to 15 hours a week free early education. Some families may also be eligible for an extra 15 hours of free childcare, known as the '30 Hours Childcare' or 'Extended Entitlement'.

From 1 April 2024, two-year-olds with eligible working parents will be allowed 15 hours free childcare a week, too. This is part of plans for a 'childcare revolution' announced bythe Chancellor Jeremy Hunt in Marchlast year.

You can read more about 15 hour childcare here.

Universal Credit

If you are in work, and are eligible for Universal Credit, you can claim back up to 85% of childcare costs. You can get a maximum of £951 for one child and £1,630 for two or more children.

How do I apply for Tax-Free Childcare?

There's one application for Tax-Free Childcare and 30 hours free childcare if you're working. As part of your application, you will find out if you can get both. You can apply on the government website. If you're eligible, you'll receive a childcare account which you can use to pay your childcare provider.

One of the crucial things to remember about the Tax-Free Childcare system is that you need to reconfirm you're eligible four times a year. You will receive timely reminders from HMRC just before renewal dates but it is important that you regularly check your HMRC account for details.

Can I apply for Tax-Free Childcare if I am self-employed?

Yes, self-employed people are eligible for tax free childcare. 'Recently self-employed people are allowed start-up periods where this income level doesn’t have to be met, or can use an average over the tax year,' says Jackson.

You can read a detailed list of who is eligible based on different incomes here.

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