Could tax-free childcare help you reduce your childcare bill?

Childcare costs are a huge issue for parents these days so any ways to bring the bills down are welcome. One of the policies the Government started to roll out in 2017  is tax-free childcare. Initially the scheme was little known and few parents took it up, but uptake has been rising in recent years. The latest tax-free childcare statistics show an increase in the number of families using the scheme, with approximately 484,000 families using tax–free childcare in November 2023, compared to 456,000 in September 2023.

There are thought to be many other parents, however, who are eligible and criticism has also focused on the fact that it tends to benefit better off parents who can pay for more hours of early years care. Early years experts say the money could be better spent. Neil Leitch of the Early Years Alliance said: “At the time when early years providers are being forced to increase fees due to sustained underfunding financially – and with the sector set to be put under even greater pressure when the early entitlements are expanded in a little over a month – it’s clear that the money used to finance tax–free childcare would better benefit both families and providers if it was used to adequately fund early entitlement offers.”

That is unlikely to happen, however, so if you are a parent who has not heard of tax-free childcare or doesn’t know how it works it’s worth reading below and seeing if you qualify. Tax-free childcare is available to both employed and self-employed parents. The Childcare Choices government website gives information about the scheme.

Tax-free childcare is available for approved childcare only. Parents who earn under £100k and at least the equivalent of 16 hours a week on the National Minimum or Living Wage each are eligible as long as they aren’t receiving tax credits, universal credit or the now suspended childcare voucher scheme [which is only available to parents who signed up before October 2018].

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. The scheme is open to children under 12 (or under 16 if they are disabled). The government says that for every £8 parents pay into an online account, the government will add an extra £2, up to £2,000 per child per year [£4K for children with a disability] or £500 every three months [this goes up to £1,000 every three months if a child is disabled, up to £4,000 a year].

Tax-free childcare takes the place of the old childcare voucher schemes offered by some employers which allowed staff to claim back the tax on their childcare costs. The aim was to ensure more parents could access this discount. Some parents have chosen to continue with the vouchers as they work in their favour financially.

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