Tax Free Childcare

Childcare is changing in England over the next year. It’s a complicated system, made more so with the introduction of tax free childcare, so here’s Smart Team’s guide to what is currently available.

Tax free childcare – 15 hours’ free childcare

Currently, all children from their 3rd birthday in England can receive up to 570 free hours of early education or child care a year, usually taken as 15 hours a week over 38 weeks. Parents can choose to divide this time up differently however to suit their own circumstances.

There will be no changes to this free provision.


Tax free childcare – 30 hours’ free childcare

From September 2017, your allowance may double to 1,140 hours per year.

For you to qualify, both you and your partner must work. If you’re a single parent, you must work. You (and your partner, if applicable) must earn the equivalent of 16 hours at National Minimum Wage or National Living Wage levels.

Anyone who is self-employed and started their business less than 12 months ago also qualifies but the earning threshold set by the National Minimum Wage or National Living Wage does not apply.

If you (and your partner, if applicable) earn more than £100,000, 30 hours’ free childcare is not open to you.

Those who are not eligible include parents whose child does not normally live with them, where the child is a foster child, or where you or your partner earn more than £100,000 a year.

If you’re working but your partner is not and you receive Incapacity Benefit, Severe Disablement Allowance, Carer’s Allowance or Employment and Support Allowance, you still may be eligible.

To start your application process, click here, making sure you have your National Insurance Number or Unique Taxpayer Reference if you’re self-employed. The application process takes about twenty minutes.


Tax free childcare – free childcare for two-year olds

A 2-year-old can also receive free early education and childcare if you get income support, job seeker’s allowance, employment and support allowance, and universal credit.

If you receive tax credits and your annual income is less than £16,190 before tax, you can also qualify as can you if you receive the Working Tax Credit 4-week run on.

To find out if you’re eligible, speak to your local council or your childcare provider.


Tax free childcare – who can look after my child or children?

You qualify for help if your child is being looked after by an approved childcare provider. These include:

  • registered childminder, playscheme, nursery or club
  • an OFSTED-registered childminding agency
  • registered school (many schools provide early years childcare – it may be worth checking out local primary schools in your area to ascertain coverage)
  • a home careworker assigned by a registered home-care agency.

You won’t be eligible for childcare financial support if your partner is looking after your child, but you may qualify if a relative is a registered childminder and you leave your child with them or you’re paying them using Universal Credit, tax credits or childcare vouchers.


Tax free childcare – the new Tax Free Childcare scheme versus the existing Employer Supported Childcare Voucher Schemes

Both the new Tax Free Childcare scheme and the established Voucher Scheme will run in tandem for a while. Applications to the Voucher Scheme system are still being accepted up until April 2018.

In this section of the article, we’ll first consider the Tax Free Childcare scheme, then Voucher Schemes, and finally look at the relative advantages and disadvantages of both.


Tax free childcare – the new Tax Free Childcare government account

Tax free Childcare and the 30 Hours Free Childcare entitlement we just described are two different systems. You can apply for both via the application form we gave above.

To qualify for the scheme, you must be working and earning between £6,240 and £100,000.


Tax free childcare – how the Tax Free Childcare scheme works

Tax free Childcare has been put in place to benefit:

  • parents who both work and pay for childcare, and
  • single parents who work and pay for childcare.

Parents in this situation include:

  • where the children are under 3 years of age and there is no government or other support (vouchers or salary sacrifice) to pay for childcare costs,
  • children aged 3 or 4 where a parent needs to use childcare over and above the hours they receive free from the government, and
  • children between 5 and 12 (17 if disabled) where there is no government support (vouchers or salary sacrifice) to pay for childcare costs.

Tax free Childcare is designed to replace the existing Childcare Vouchers scheme from April 2018.

For every £8 a parent pays into their Tax Free Childcare account, the government tops this up by an additional £2 to a maximum of £2,000 per year per child. If your child has a disability, this maximum is increased to £4,000 per year.

To qualify for the scheme, you must be working and earning between £6,240 and £100,000. If you have a partner, you must both be working and earning between those pay levels. Please note that if your partner loses his/her job, your eligibility for the scheme will cease until he or she finds him- or herself in work again.


Tax free childcare – paying your childcare provider

Once you have been accepted, your online account will open. You’ll need to re-confirm your eligibility for the scheme every three months once accepted.

With your account, you’ll be able to see all your children’s accounts in one place, start paying into your children’s childcare accounts, and use it to pay your childcare provider (it can take 2-3 working days for the payment to reach their account). Once you add £8, the government will automatically top your account up by £2.


Tax free childcare – effects on other benefits

If you apply for Tax Free Childcare, you will no longer be able to receive Child Tax Credit, Working Tax Credit, Universal Credit, or childcare vouchers from your employer.

You will automatically stop receiving Child Tax Credit and Working Tax Credit upon a successful application. If you’re getting childcare vouchers from your employer, you must tell then within 3 months of making your application for Tax Free Childcare.


Tax free childcare – withdrawing money from and closing your account

You are entitled to withdraw as much money from your Tax Free Childcare account as you like subject to the amount of funds available within it.

When you close your account (for example, if you’re no longer eligible), the government will transfer the balance back to your nominated account.


Tax free childcare – Employer Supported Childcare Voucher Schemes

This scheme is only available to you if an employer offers them. If you run your own limited company and you are a director, you can make Childcare Vouchers available to yourself as an employed director.

There is no minimum or maximum earnings level you need to qualify for support. Both parents do not have to work to receive Childcare Vouchers. You can also use vouchers for children aged up until the age of 15 (16 if disabled).

You don’t have to pay tax and National Insurance on vouchers, childcare that your company arrange with a provider or on workplace nurseries.

As mentioned earlier in this article, this scheme stops accepting new applications in April 2018 but the service will continue for all existing accounts thereafter.


Tax free childcare – the two systems at a glance

Tax Free Childcare works for the self-employed or for couples who earn less than £100,000 a year and for parents with more than one child and high costs of childcare.

Childcare Vouchers, where offered, are better for those in a relationship/marriage where one partner does not work. You’ll save more with Vouchers if you are basic rate taxpayers with childcare costs of £9,336 or less or higher rate taxpayers with childcare costs of £6,252.

Those earning £100,000 or more can also take advantage of Childcare Vouchers unlike Tax Free Childcare.


Tax free childcare – get help

This is a complicated subject for companies and their directors. Depending on your own personal situation, you may benefit from setting up a Childcare Voucher scheme before April 2018.

We strongly urge you to contact us to help you work out what is best for you and your family.

Ask the Smart Team for help on 01202 577500 or email

Start typing and press Enter to search