Can you benefit from tax-free childcare?

In a climate of rising interest rates and rising inflation, every penny is likely to count. For working parents, help with their childcare costs is welcome. The tax-free childcare system can provide up to £2,000 a year tax-free.

Tax-free childcare

The Government’s tax-free childcare scheme allows working parents to open an online childcare account to pay for their childcare costs and receive a tax-free top-up from the Government on the amount that they deposit in the account. The top-up is worth 25% of the amount deposited to a maximum of £500 a quarter (£2,000 a year). This means that every £80 deposited by the parent pays for £100 of childcare costs until the cap is reached. A parent paying £667 a month into the account will receive the maximum top up.

If the child is disabled, the maximum top-up is doubled to £1,000 a quarter (£4,000 a year).

The money in the childcare account can only be used to pay for approved childcare, such as that provided by a childminder, nursery nanny or by an after-school club or play scheme. The childcare provider must be signed up to the scheme.

Eligibility

To be eligible for the tax-free top-up, a parent must be working, on sick or annual leave or maternity, paternity or adoption leave. A parent may also be eligible if their partner is working and they are on certain benefits and are re-starting work within the next 31 days.

The parent must also pass an income test. Over the next three months, the parent and their partner if they have one must earn at least:

• £1,967 where they are aged 23 or over;
• £1,909 where they are aged 21 or 22;
• £1,420 where they are aged 18 to 20; or
• £1,000 if they are under 18 or an apprentice.

This is equivalent to 16 hours a week at the relevant National Living or Minimum Wage. Dividends, interest, income from property and pension payments are not taken into account. Where a person is not paid regularly, average income over the year can be used.

The child

The childcare provided with the money from a tax-free childcare account must be for a child aged 11 or under living with the claimant. Eligibility ceases from 1 September following the child’s 11^th birthday. Where the child is disabled, they must be under the age of 17.

Exclusions

The tax-free childcare top-up cannot be claimed at the same time as universal credit, working tax credit or child tax credit. Employees who joined their employer’s childcare voucher or supported childcare scheme on or before 4 October 2018 cannot benefit from both tax relief under the scheme and tax-free childcare.

Where more than one source of help is available, it is advisable to do the sums to see which is most beneficial.