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Tax-Free Childcare: A Practical Guide for Parents

Image of children sitting in a circle, pink circle with the words: Tax Free Childcare: A practical guide for parents

What is Tax Free Childcare?

Tax-free childcare (TFC) is a government scheme that can help parents save money on their childcare costs. The scheme offers eligible families a contribution of up to £2,000 per child per year (up to £500 every 3 months) towards childcare costs. If your child is disabled, you can get up to £4,000 per year (£1000 every 3 months).

You can use tax-free childcare to pay for a wide range of childcare providers, including nurseries, childminders, and after-school clubs. Just check in advance that they accept TFC.

Tax-free childcare is a great way to save money on your childcare costs. If you are eligible, I encourage you to sign up for the scheme. That being said, it can be complicated to administrate, so I’m going to share with you my best tips.

Who is eligible?

To be eligible for tax-free childcare, you and your partner must:

  • Be working or self-employed or both
  • Have a national insurance number
  • Be returning to work within the next 31 days after parental or adoption leave
  • Each earn at least £2,167 in each 3 month period of eligibility (if you’re over 23, if you’re younger then check out the website for the eligibility)
  • Neither parent earning over £100k adjusted net income
  • Have a child under the age of 11 or under living with you

Note this blog was written in August 2023, the eligibility may change so please always check the current rules.

How does it work?

Once you are eligible for tax-free childcare, you can set up an online account through the government website. You can then pay money into your account, and the government will top up your account by 20%. For example, if you pay £80 into your account, the government will add their contribution of £20, up to £500 every three months.

How to calculate what to pay into your TFC account.

Take the amount you need to pay your childcare provider and multiply it by 0.8. This is the amount you should transfer into your TFC account. The government will then top up the additional 20% and you should then have the correct amount in the account to transfer to the childcare provider.

You can set up a standing order from your bank account into your online TFC account, and you can set up a regular payment to go from your TFC account directly to the provider. Simple!…..

except not so simple if your childcare bill is higher than £830 per month because the £500 per quarter contribution isn’t enough to have a regular payment set up based on you paying 80% in. Buckle up for a bit of a complicated process…

Let’s assume that your nursery bill is £1000 per month…

Month 1 you would pay £800 into TFC and get a top up of £200

Month 2 you would pay £800 into TFC and get a top up of £200

By month 3 you only have £100 left in the quarterly allowance pot… so in the third month of every eligibility period, you will need to pay an additional £100 to your childcare provider.

 

This might not be a problem for you, and if that’s the case, you might choose to do a manual transfer each month into and out of your TFC account.

 

But…if you want to have the same payments going out every month, you could do it like this…

For this option, you would set up two different standing orders, one into TFC to get the £500 allowance split equally over three months, and another directly to your childcare provider for the difference.

For example, if your nursery bill is £1000:

Month 1       

pay £664 into TFC and get the top up of £166

pay £170 directly to your childcare provider taking the total to £1000

Month 2       

pay £664 into TFC and get the top up of £166

pay £170 directly to your childcare provider taking the total to £1000

Month 3       

pay £664 into TFC and get the top up of £166

pay £170 directly to your childcare provider taking the total to £1000

 

Note: I used £1000 as an example for ease of maths, if your bill is more than £830 you can just work out the difference and that’s what you pay directly to the provider.

Here are some additional things to keep in mind about tax-free childcare:

  • You can use tax-free childcare alongside other childcare support, such as 30 hours free childcare.
  • If you don’t use the funds in your TFC account, you can withdraw them at any time (minus whatever amount the government has topped up)
  • The government will check your eligibility every three months. Do not miss the deadline for confirming your eligibility otherwise you may not be entitled to claim the full £500 for the period.
  • You can only use tax-free childcare for childcare that is registered with Ofsted.

If you have any questions about tax-free childcare, you can contact the HMRC childcare service helpline on 0300 123 4097.

I hope this blog post has been helpful. If you are a parent looking for ways to save money on childcare, I encourage you to consider tax-free childcare. It is a great way to get help with the cost of childcare and give you peace of mind knowing that you are making the most of the government support.