The Tax-Free Childcare scheme is a UK Government initiative designed to help working parents with the cost of childcare. The scheme is designed to be simple to use and flexible, providing support for parents with children aged 11 and under, or 16 and under if the child is disabled.
What is Tax-Free Childcare?
Tax-Free Childcare (also known as TFC) is a scheme where the UK government contributes towards the cost of childcare. For every £8 you pay into your childcare account, the government will pay £2, up to a maximum of £500 every three months per child, or £1,000 for a child who is disabled. This totals up to £2,000 a year, or £4,000 a year for a child who is disabled. The funds from this account can be used to pay for approved childcare providers, including childminders, nurseries, nannies, after-school clubs, and play schemes.
What Can Tax-Free Childcare Be Used for?
This scheme can be used to pay for approved childcare. This includes childminders, nurseries, nannies, after-school clubs, and play schemes. It is important to note that your childcare provider must be signed up to the scheme before you can pay them and benefit from Tax-Free Childcare.
If your child is disabled, the extra money from the Tax-Free Childcare scheme can be used to pay for extra hours of childcare or to help your childcare provider acquire specialist equipment such as mobility aids for your child.
What is "Approved Childcare" for Tax-Free Childcare in the UK?
In the UK, 'approved childcare' refers to childcare provided by:
Registered childminders, nannies, playschemes, nurseries, or clubs.
Childminders or nannies associated with a registered childminder agency or childcare agency.
Registered schools.
Home care workers working for a registered home care agency.
The rules about how childcare providers become approved vary depending on where you live in the UK. You can check if a childcare provider is approved or search for one through the relevant regulatory bodies in England, Wales, Scotland, and Northern Ireland.
If you want to claim 30 hours of free childcare in England, the provider will also need to be on an Early Years Register with Ofsted or with a registered early years childminder agency.
It's important to note that you can only get help paying for care that is outside school hours, such as after-school clubs or breakfast clubs. You cannot get help paying for your child’s compulsory education or private lessons during school time.
Childcare provided by relatives can only be considered 'approved childcare' under certain conditions. For instance, in England or Scotland, you can only get Tax-Free Childcare to help pay for childcare provided by a relative (like a grandparent) if they’re a registered childminder and care for your child outside your home.
Childcare provided by a foster carer in England only counts if they’re registered as a childcare provider. In Wales, Scotland, and Northern Ireland, there are specific rules regarding when childcare provided by a foster carer can be claimed.
Who is Eligible for Tax-Free Childcare?
Eligibility for the Tax-Free Childcare scheme depends on several factors, including your employment status, income, your child's age and circumstances, and your immigration status. Both employed and self-employed individuals can qualify, and you may still be eligible if you're on sick leave, annual leave, or various types of parental leave. If you're not currently working, you may still qualify under certain conditions, such as if your partner is working and you receive certain types of benefits.
Your income also plays a role in eligibility. Over the next three months, you and your partner (if applicable) must each expect to earn at least a certain amount, which varies based on your age. Certain types of income, such as dividends, interest, income from property investments, and pension payments, do not count toward this minimum amount.
Income: Over the next three months, you and your partner, if you have one, must each expect to earn at least a certain amount, depending on your age. If you're self-employed and started your business less than 12 months ago, you can earn less and still be eligible for Tax-Free Childcare. Certain types of income, like dividends, interest, income from investing in property, and pension payments, do not count toward the minimum amount you must earn to be eligible. If you or your partner have an expected 'adjusted net income' over £100,000 in the current tax year, you will not be eligible.
Child's Age and Circumstances: Your child must be 11 or under and usually live with you. If your child is disabled and usually lives with you, you may get up to £4,000 a year until 1 September after their 16th birthday.
Immigration Status: To be eligible for Tax-Free Childcare, you must have a National Insurance number and at least one of several types of status, including British or Irish citizenship, settled or pre-settled status, or permission to access public funds. If you have a partner, they must also have a National Insurance number.
The following table outlines the eligibility criteria for the UK's Tax-Free Childcare scheme. It covers general eligibility, working status, income thresholds, child's age, and immigration status.
This calculator collects the total amount payable to the childcare provider and the amount already contributed by the government. By using the calculator, you would calculate the amount the user needs to pay into their government childcare account and the amount the government will contribute.
Restrictions and Considerations
You cannot receive Tax-Free Childcare at the same time as claiming Working Tax Credit, Child Tax Credit, Universal Credit, or childcare vouchers. If you apply for Tax-Free Childcare, your Working Tax Credit or Child Tax Credit will stop immediately, and you cannot apply for them again. If you're receiving childcare vouchers, you must tell your employer within 90 days of applying for Tax-Free Childcare to stop your childcare vouchers. If you're on Universal Credit, it's advised that you wait until you get a decision on your Tax-Free Childcare application before cancelling your Universal Credit claim.
The scheme you're better off with depends on your specific situation, and the government provides a childcare calculator tool to help you work out which type of support is best for you.
Applying for Tax-Free Childcare
You can apply for Tax-Free Childcare online. If you have a partner, you must include them in your application. If you and your partner are both eligible, you cannot both have accounts for the same child. If you are separated and jointly responsible for your child, you and your ex-partner need to decide who should apply. If you cannot decide, both of you must apply separately and HM Revenue and Customs (HMRC) will decide who gets a childcare account.
Here is a Step-by-Step Guide on How to Apply for Tax-free Childcare in the UK:
Check Your Eligibility: Start by checking if you're eligible for Tax-Free Childcare and learning about the types of childcare you can use. This is an important step as not everyone will be able to avail of this service.
Consider Your Financial Situation: Understand that your tax credits will stop immediately if you successfully apply for Tax-Free Childcare. If you (and your partner, if you have one) are also receiving Universal Credit or childcare vouchers, you will need to cancel these. Make sure to consider these factors and check if applying for Tax-Free Childcare is the right option for you.
Apply for Tax-Free Childcare: Once you've determined your eligibility and considered your financial situation, you can proceed to apply for Tax-Free Childcare. This application also covers 30 hours of free childcare, and you'll find out if you're eligible for both as part of your application. If you're eligible, you'll be given a childcare account which you can use to pay your childcare provider. To apply, you'll need your details (and your partner's, if you have one), including your National Insurance number and Unique Taxpayer Reference (UTR) if you're self-employed. The application process should take approximately 20 minutes, and you may find out your eligibility status immediately, but it can take up to 7 days.
Make Payment: Once you have applied and set up your account, you can sign in to your account to pay your childcare provider. Payments can be made from your account once the money is shown as ‘cleared funds’. Payments should show in your provider’s account within 24 hours, depending on their bank​.
Reconfirm Your Details: Remember to reconfirm your details every 3 months. This is a necessary step to ensure that your details are up-to-date and you continue to receive the benefits of Tax-Free Childcare​.
Making Payments into a Childcare Account
Payments into a childcare account can be made via direct debit, standing order, or bank transfer, but not by credit card. The deposited money, along with any government top-up, should be visible immediately, but it takes one working day before any amount paid in is available as cleared funds. Anyone can pay into the account, not just the account holder, as long as they have the relevant details for deposits.
Qualifying Payments and Their Limits
A qualifying payment refers to any payment into a childcare account other than a top-up payment or a repayment of any payment made from the childcare account. Anyone can make a qualifying payment into the account during an entitlement period, provided that the account holder has made a valid declaration of eligibility for the entitlement period, and the child is a qualifying child at the time of payment. The limits for qualifying payments are £4,000 for a disabled child and £2,000 per 3-month entitlement period for all other children. Only qualifying payments will attract a Government top-up.
Timing of Payments into an Account
The timing of payments into a Tax-Free Childcare account is crucial as the government top-up is paid as soon as a qualifying payment is made into the account. It does not matter when the childcare provider is paid. Therefore, claimants with variable childcare costs should consider their childcare costs over the year to get the maximum benefit from the scheme.
Withdrawing Payments from the Account
Apart from payments to the childcare provider, the claimant is free to withdraw money from the account. However, the amount withdrawn will be deducted from the total sum in the account that attracts the Government top-up payment. If the withdrawal amount has already attracted the top-up, then the value of the top-up that corresponds to the value of the withdrawal has to be repaid to HMRC.
Managing Multiple Childcare Accounts
If a claimant has more than one eligible child, they will have a separate childcare account for each child. Childcare costs for each child must be paid out of the correct childcare account, and it is not possible to transfer money between childcare accounts. It is therefore important to ensure that payments are made into the correct account.
The Impact of Tax-Free Childcare on Payroll
The Shift from Childcare Vouchers to Tax-Free Childcare
The Tax-Free Childcare scheme, introduced in 2017, replaced the previous childcare voucher scheme. This new scheme, managed by HMRC, offers a 20% top-up on every 80p a working parent contributes to a designated online account, effectively refunding the parent's basic-rate tax on their childcare contribution. This tax relief is available on the first £10,000 of childcare costs per child, allowing parents to receive up to £2,000 per year from the UK government to cover approved childcare costs.
Eligibility for Tax-Free Childcare
To qualify for Tax-Free Childcare, a parent must be at work, have a child aged 11 or under who usually lives with them, and earn at least £125.28 per week. Both parents must be in work if there are two parents in the household. Parents cannot claim Tax-Free Childcare if either partner has a taxable income above £100,000 or if they receive any tax credits, Universal Credit, or employer-supported childcare such as childcare vouchers.
Tax-Free Childcare vs. Childcare Voucher Scheme
The Tax-Free Childcare scheme and the childcare voucher scheme each have their own advantages and disadvantages. Tax-Free Childcare is open to all qualifying parents, including the self-employed, and allows grandparents, family members, and friends to contribute to the account. However, it is limited to parents of children aged 11 or under (or under 17 if the child has disabilities), and cannot be used by couples where one parent doesn't work or doesn't earn the minimum amount to be eligible. The childcare voucher scheme, on the other hand, can be used by couples with only one working parent and by higher-rate taxpayers who earn more than £100,000.
Implications for Payroll
The Tax-Free Childcare scheme reduces the administrative burden on businesses as the arrangement is made directly between the government and the individual. However, businesses may face questions from their employees about the differences between the two schemes. Employees who currently receive childcare vouchers are obliged to inform their employer if they decide to participate in Tax-Free Childcare, and the payroll team will need to adjust its payroll accordingly. Employers can also choose to pay into an employee's childcare account on behalf of the employee.
While the Tax-Free Childcare scheme is more accessible to a larger number of working parents than the childcare voucher arrangement, there will be individual winners and losers with both schemes. Therefore, parents need to weigh up their choices carefully when deciding how they want to cover their childcare costs, and they are likely to need the support of their employer to do this.
The Benefits of Tax-Free Childcare
Broad Accessibility
One of the significant advantages of the Tax-Free Childcare scheme is its broad accessibility. Unlike the previous childcare voucher scheme, which was only available to employees whose employers offered it, Tax-Free Childcare is open to all qualifying parents. This includes self-employed individuals, who were often excluded from the voucher scheme, thus providing more inclusive support for diverse working situations.
Monetary Support
The Tax-Free Childcare scheme offers substantial financial support for parents. For every 80p contributed into the account, the government adds 20p. This effectively means that the government is covering 20% of childcare costs, up to a maximum of £2,000 per child per year (£4,000 for a disabled child). This can make a significant difference to families managing the high costs of childcare.
Flexibility in Contributions
Another advantage of the Tax-Free Childcare scheme is the flexibility it offers. Not only can parents pay into the account, but also grandparents, other family members, and even friends. This allows for wider family support in managing childcare costs.
The Drawbacks of Tax-Free Childcare
Eligibility Restrictions
While the Tax-Free Childcare scheme is more accessible in some ways, it also has strict eligibility requirements. Both parents must be in work (unless it's a single-parent family), each earning at least £125.28 per week, but not more than £100,000 per year. This means that families where one parent doesn't work, or where a parent earns over the income threshold, cannot benefit from the scheme.
Age Limitations
The Tax-Free Childcare scheme is only available for children aged 11 or under, or children under 17 with disabilities. This is a lower age limit than the previous childcare voucher scheme, which covered children up to the age of 15, or 16 if disabled. This can make the scheme less beneficial for parents with older children.
Potential for Lower Savings
For some families, the Tax-Free Childcare scheme may offer less financial benefit than the previous childcare voucher scheme. This is particularly the case for basic-rate taxpayers with lower childcare costs, as the voucher scheme provided tax and National Insurance relief, potentially leading to higher overall savings.
The Tax-Free Childcare scheme in the UK offers several advantages, including broad accessibility, substantial monetary support, and flexibility in contributions. However, it also has its drawbacks, such as strict eligibility restrictions, age limitations, and potentially lower savings for some families. Therefore, it's crucial for each family to consider their individual circumstances and weigh the pros and cons before deciding whether the Tax-Free Childcare scheme is the best option for them.
Can Tax-Free Childcare Be Used Year-Round?
Yes, the Tax-Free Childcare scheme in the UK can be used year-round. Once you've opened an online childcare account and are making contributions, the government will top up your account with their contribution of £2 for every £8 you pay in. This happens 'quarterly' or every three months. You can then use the funds in your account to pay for approved childcare at any time throughout the year.
However, it's important to note that your eligibility for the scheme is reassessed every three months, so you need to keep your details up to date in your childcare account. If your circumstances change significantly - for instance, if your income drops below the minimum threshold or you stop working - you may no longer be eligible for the scheme.
How Can a Tax Accountant Help You with Tax-Free Childcare?
A tax accountant is a professional specializing in tax law and compliance. They provide advice on tax-related matters, assist in the preparation and filing of tax returns, and ensure you are taking full advantage of tax allowances, reliefs, and exemptions, like the TFC scheme.
Assessing Eligibility for Tax-Free Childcare
The first step a tax accountant can assist with is determining your eligibility for the TFC scheme. The requirements include being a working parent (or parents), earning a minimum amount, and having a child under 12. The scheme is also available for parents of disabled children under 17. A tax accountant can accurately assess your situation against these criteria, providing a clear picture of your eligibility.
Maximizing Benefits from the TFC Scheme
The TFC scheme offers parents up to £500 every three months (£2,000 per year) for each child to help with childcare costs. For disabled children, the maximum benefit is £4,000 per year. A tax accountant can help ensure you receive the maximum benefits you are entitled to, guiding you on how to apply these funds in the most tax-efficient manner.
Managing Your TFC Account
Once you are enrolled in the TFC scheme, you must reconfirm your eligibility every three months. A tax accountant can help manage this process, ensuring you don't lose your benefits due to administrative oversights. They can also advise you on how to use your online account, where you can pay your provider and keep track of your payments.
Navigating Complex Situations
Certain situations can complicate your TFC claims, such as changes in income, family circumstances, or childcare providers. These can affect your eligibility and the amount you receive. A tax accountant can guide you through these complexities, ensuring you continue to receive the maximum benefits while remaining compliant with the scheme's rules.
Resolving Disputes and Audits
If there are any disputes about your TFC claim or if you are subject to an audit, a tax accountant is an invaluable ally. They can help you understand the process, gather necessary documentation, and present your case effectively to HM Revenue and Customs (HMRC).
The Value of a Tax Accountant
A tax accountant can provide crucial guidance and support in navigating the TFC scheme, ensuring you maximize the benefits and remain compliant with its rules. Their expertise can relieve the stress of managing these financial matters, allowing you to focus more on your family and less on the complexities of tax law.
FAQs on Tax-Free Childcare in the UK
Q1:Â What steps should I take if my application for Tax-Free Childcare is rejected?
A1:Â If your application is rejected, you should review the eligibility criteria to ensure you meet all requirements. If you believe there was a mistake, you can contact HMRC for clarification and appeal the decision if necessary.
Q2:Â Can Tax-Free Childcare be used to pay for summer camps?
A2:Â Yes, Tax-Free Childcare can be used to pay for summer camps if the camp is run by an approved childcare provider.
Q3:Â How does Tax-Free Childcare work for parents of twins or multiple children?A3:Â Parents of twins or multiple children can use Tax-Free Childcare for each eligible child, potentially doubling the benefit if both children qualify.
Q4:Â Is it possible to use Tax-Free Childcare alongside other educational grants or scholarships for childcare?
A4:Â Tax-Free Childcare can be used in conjunction with educational grants or scholarships, provided these do not cover the same childcare costs.
Q5:Â How do changes in income affect Tax-Free Childcare eligibility?
A5:Â Significant changes in income can affect your eligibility. You must reconfirm your circumstances every three months to ensure you still qualify.
Q6:Â Can non-UK residents who work in the UK apply for Tax-Free Childcare?
A6:Â Non-UK residents can apply if they work in the UK and meet other eligibility criteria, including having a child in UK childcare.
Q7:Â What happens to my Tax-Free Childcare account if I stop working?
A7:Â If you stop working, you may lose eligibility for Tax-Free Childcare. However, exceptions exist, such as if you're on parental leave.
Q8:Â Can I pay my nanny directly through the Tax-Free Childcare system?
A8:Â Yes, you can pay your nanny directly through the system if they are a registered childcare provider.
Q9:Â Are there any penalties for withdrawing money from the Tax-Free Childcare account for non-childcare uses?
A9:Â Withdrawing money for non-childcare purposes is allowed, but the government's contribution must be repaid for the withdrawn amount.
Q10:Â How does Tax-Free Childcare impact my tax return?
A10:Â Contributions to Tax-Free Childcare do not affect your tax return, as the scheme operates independently of your tax liabilities.
Q11:Â Can grandparents contribute to Tax-Free Childcare?
A11:Â Yes, grandparents can contribute to a child's Tax-Free Childcare account.
Q12:Â How long does it take for the government top-up to be added to my Tax-Free Childcare account?
A12:Â The government top-up is usually added to the account within a few working days after you make a contribution.
Q13:Â Can I use Tax-Free Childcare for international schools in the UK?
A13:Â Tax-Free Childcare can be used for international schools if they are registered with the UK government as approved childcare providers.
Q14:Â What documentation is required to prove eligibility for Tax-Free Childcare?
A14:Â You may need to provide proof of employment, income, and your child's age and residency status.
Q15:Â How does Tax-Free Childcare work for self-employed individuals?
A15:Â Self-employed individuals are eligible for Tax-Free Childcare if they meet the income requirements and other eligibility criteria.
Q16:Â Can I switch from childcare vouchers to Tax-Free Childcare?
A16:Â Yes, you can switch, but you cannot use both schemes simultaneously. You must stop receiving vouchers to use Tax-Free Childcare.
Q17:Â What is the deadline for applying for Tax-Free Childcare each year?
A17:Â There is no annual deadline; you can apply at any time, but you must reconfirm your eligibility every three months.
Q18: How is the £2,000 per child per year government top-up calculated in Tax-Free Childcare?
A18: The government provides 20% of childcare costs up to £10,000 per child per year, equating to a maximum of £20 in Tax-Free Childcare.
Q19:Â What security measures are in place to protect Tax-Free Childcare accounts from fraud?
A19:Â The government uses several security measures, including secure login processes and monitoring for unusual account activity, to protect against fraud.
Q20:Â Can Tax-Free Childcare be used for emergency or last-minute childcare?
A20:Â Yes, as long as the childcare provider is registered and approved, you can use your Tax-Free Childcare funds for emergency or last-minute care.
Disclaimer
This article is meant to serve as a guide and does not constitute legal advice. The steps involved in calculating tax-free childcare may vary depending on the specific circumstances of the situation. It may contain some incorrect information though we have made every attempt to keep it updated. Always seek professional advice before making any decisions related to any tax-related matter.