What is Tax-Free Childcare?


For many parents, childcare costs can be a burden. Fortunately, there are ways parents can get help with reducing the cost of childcare, such as the tax-free childcare scheme.

The tax-free childcare scheme was first introduced in April 2017 to provide parents with a 20% tax-relief on childcare services. Per year, parents can save up to £2,000 on childcare costs through the tax-free childcare scheme.

Tax-free childcare will eventually replace childcare vouchers. Since tax-free childcare was introduced, childcare vouchers were closed to new entrants. Only parents who claimed childcare vouchers before October 2018 are able to use them.

How does it work?

You use the tax-free childcare scheme by creating an account through the government website. Once your account has been set up you pay money into it like you would with a bank account. The government then tops up your account with their contributions.

Example: For every £8 you pay into the account; the government contributes £2

Anyone can pay into your tax-free childcare account, so it’s a great way for relatives and extended family such as grandparents to help with your childcare costs. You can pay as much or as little into the account as you want. You can also build up credit to use at a later date. There are no costs to using the scheme.

From your account, you can then pay your childcare provider so long as they are also signed up to the scheme. You should bear in mind that it can take up to 5 working days for the money to be transferred to a childcare provider, so make sure you plan your payments in line with your childcare provider’s payment terms.

Is the scheme available to anyone?

The eligibility criteria for the tax-free childcare scheme is as follows:

  • Your child must be 11 years old or younger
  • If your child has a disability, they will be eligible until they are 17 years old*
  • Tax-free childcare is only available for working parents**
  • Self-employed parents are eligible
  • You or your partner must not earn more than £100,000 in the current tax year
  • You must be a citizen of the UK or European Economic Area (EEA)
  • Once you have applied you must re-confirm your eligibility through your account portal every 3 months.

*The government will increase their contributions up to a maximum of £4,000 per year for disabled children.

**You and your partner must both be working at least 16 hours at the National Minimum or Living Wage

How do I apply for tax-free childcare?

You can apply by visiting www.gov.uk/apply-for-tax-free-childcare.

You’ll need to have your National Insurance (NI) number or Unique Taxpayer Reference (UTR) to hand when applying.

You can only have one account per child, so you will need to decide between yourself and your partner who will register the account.

Where can I use tax-free childcare?

You can use the scheme for any formal childcare so long as the provider is registered with Ofsted, the Early Years Register or the Childcare Register. This will include most day nurseries, pre-schools, playgroups, registered childminders, nannies/au pair or breakfast and out of school clubs.

The scheme cannot be used to pay for informal childcare such as a babysitter or family providing informal childcare.

Childcare providers must also be registered with the scheme for you to pay them through your account. If your provider is not registered, then let them know.

How much money will I save?

For every £8 you pay into your account, the government will add £2. The maximum the government will contribute to your account per year is £2,000. However, if your child is disabled, the government will contribute a maximum of £4,000 per year.

Can I take money out of my tax-free childcare account?

You can take money out of your account if you need to. You can do this online. Please note, the government will deduct any contribution they have already made from any amounts you withdraw from your account.

I am already using childcare vouchers. Should I switch to tax-free childcare?

Childcare voucher schemes are now closed to new entrants; however, they are still open to those who registered before the tax-free childcare scheme started. If you prefer to continue using childcare vouchers, then you are free to do so. You can find out whether you wold be better off switching to the tax-free childcare scheme here.

Can I use the tax-free childcare scheme alongside my 15- or 30-hours funding?

You can still use the scheme even if you’re claiming for the 15- or 30-hours funding. This is helpful if you still have a childcare bill to pay after your funding has been deducted.

Can I use tax-free childcare with tax credits or universal credit?

You cannot use the scheme at the same time as claiming working tax credits or universal credit. As soon as you make a successful application for a tax-free childcare account your working tax credits or universal credit payments will be withdrawn.

Ultimately, whether tax-free childcare is the best option for you to reduce your childcare costs will depend entirely on your circumstances. Why not use the childcare calculator to see the best way for you to save money on your childcare costs?

If you found this blog helpful, then you might benefit from reading about other ways you can reduce your childcare costs, such as Nursery Entitlement Funding (NEF).

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