Tax-Free Childcare
Official Definition
According to HMRC, Tax-Free Childcare is a government scheme where for every £8 you pay into your childcare account, the government adds an extra £2, up to a maximum of £2,000 per child per year (£4,000 for disabled children).
What It Is (Plain English)
Think of Tax-Free Childcare as getting a 25% government top-up on childcare costs. You open an online account, pay in money for nursery/childminder fees, and the government automatically adds 25% extra. So if you pay £800 in childcare one month, the government adds £200, giving you £1,000 to spend.
The catch? Both parents must earn under £100,000 individually (not combined). Go even £1 over and you lose the entire benefit for that quarter - the harsh "£100k cliff edge".
- Top-up rate: 25% (government adds £2 for every £8 you pay)
- Maximum per child: £2,000/year (£500 government contribution per quarter)
- Disabled child: £4,000/year (£1,000 per quarter)
- Income limit: Both parents under £100,000 each
- Minimum earnings: Both parents earning at least £8,788/year
- Can't combine with: Childcare vouchers, Universal Credit childcare element
How It Works
- Apply online at Childcare Choices
- Get approved and receive your childcare account
- Pay money into the account when you need to pay childcare fees
- Government automatically adds 25% (up to quarterly limits)
- Pay your childcare provider directly from the account
- Reconfirm eligibility every 3 months
Scenario: Nursery costs £800/month
- You pay in: £800
- Government adds: £200
- Total in account: £1,000
- You pay nursery: £1,000
Your saving: £200/month = £2,400/year
(But remember the cap - you can only claim £2,000/year max per child)
Who is Eligible?
You qualify if ALL of these apply:
- Your child is under 12 (or under 17 if disabled)
- You (and your partner if you have one) are in paid work
- Each of you earns at least £8,788/year (roughly 16 hours at minimum wage)
- Neither of you earns over £100,000/year
- You're not getting Tax Credits or Universal Credit (except in some cases)
- Your childcare provider is registered and approved
Self-Employed?
You need to expect to earn at least £8,788 over the next 3 months on average. HMRC won't check your actual earnings immediately, but you need to reasonably expect to meet this threshold.
On Maternity/Paternity Leave?
You're still eligible if you're on paid leave or will be returning to work within 31 days. The income test is based on your normal salary, not maternity pay.
The £100,000 Cliff Edge
If either parent earns £100,000 or more in a quarter, you lose Tax-Free Childcare for that entire quarter. There's no taper - it's a cliff edge. Earning £99,999 = fully eligible. Earning £100,001 = lose it all.
This creates a harsh marginal rate for people earning close to £100,000:
Earning £99,000:
- Take-home after tax/NI: ~£67,500
- Tax-Free Childcare: £4,000 (two children)
- Total benefit: £71,500
Earning £101,000 (£2,000 more):
- Take-home after tax/NI: ~£68,000
- Tax-Free Childcare: £0 (over threshold)
- Total benefit: £68,000
Result: Earning £2,000 more costs you £3,500!
How to Avoid the Cliff Edge
1. Pension Contributions
The £100,000 limit is based on your adjusted net income (after pension contributions). Paying into a pension reduces this figure. If you earn £105,000, putting £5,000+ into your pension keeps you under the limit.
Salary sacrifice pensions work best because they reduce your "income" for Tax-Free Childcare purposes.
2. Charitable Donations
Gift Aid donations also reduce adjusted net income, though less effectively than pensions for most people.
3. Timing Bonuses
If you get a large annual bonus, consider deferring it to the next tax year if it pushes you over £100,000. Tax-Free Childcare is assessed quarterly, so one bad quarter loses you benefits for 3 months only.
4. Split Income with Spouse
If one parent earns £120,000 and the other earns £40,000, shifting income through dividends (if contractors) or other arrangements might help both stay under £100,000.
Maximum Benefit You Can Get
| Number of Children | Annual Childcare Spend | Government Top-Up | Your Net Cost |
|---|---|---|---|
| 1 child | £10,000 | £2,000 | £8,000 |
| 2 children | £20,000 | £4,000 | £16,000 |
| 3 children | £30,000 | £6,000 | £24,000 |
| 1 disabled child | £20,000 | £4,000 | £16,000 |
If you don't spend £10,000/year on childcare, you get 25% of whatever you do spend, up to the cap.
Tax-Free Childcare vs Childcare Vouchers
If you already have childcare vouchers (the old scheme), you might be better off keeping them rather than switching to Tax-Free Childcare:
| Feature | Tax-Free Childcare | Childcare Vouchers |
|---|---|---|
| Maximum benefit (basic rate) | £2,000/year per child | £933/year per parent |
| Maximum benefit (higher rate) | £2,000/year per child | £1,866/year per parent (!) |
| Open to new joiners? | Yes | No (closed 2018) |
| Income limit | Under £100k each | None |
| Multiple children | Multiply by children | Same amount total |
Key insight: If you're a higher-rate taxpayer with one child and already have vouchers, you're likely better off keeping them (up to £3,732/year for two parents vs £2,000 for Tax-Free Childcare).
You can't have both. If you switch from vouchers to Tax-Free Childcare, you can't switch back.
Common Questions (FAQ)
Can I use Tax-Free Childcare for any childcare provider?
Only approved providers registered with Ofsted (England), Care Inspectorate Wales, etc. This includes most nurseries, childminders, and after-school clubs. Ask your provider if they're registered for Tax-Free Childcare.
What if my income fluctuates around £100k?
Tax-Free Childcare is assessed quarterly. If you go over £100k in one quarter, you lose it for that quarter only. You can reapply in the next quarter if you're back under. Our calculator helps you monitor this.
Is the limit £100k combined or each?
Each parent individually. So if you earn £90k and your partner earns £90k (£180k combined), you're still eligible. But if one of you earns £100k+, you're out.
Can I get both Tax-Free Childcare and free childcare hours?
Yes! They work together. You can get your 15 or 30 free hours, and then use Tax-Free Childcare to pay for additional hours or wraparound care.
What if I'm on Universal Credit?
Usually you can't have both. Universal Credit has its own childcare element that covers up to 85% of costs. You'll need to compare which is better for your situation.
Do I have to use all the money in one quarter?
No - unused money stays in your account and rolls over to the next quarter. But you can only receive £500 in government top-ups per quarter (per child), so spreading payments throughout the year maximizes your benefit.
What if I forget to reconfirm every 3 months?
Your account closes and you lose access to the funds. You can reapply, but it can take a while to reopen. Set a reminder for every 3 months - HMRC sends warnings but it's easy to miss them.
How the Calculator Helps
Our calculator identifies when your income approaches or crosses the £100,000 threshold and shows you:
- Whether you're at risk of losing Tax-Free Childcare
- How much pension contribution would keep you under the limit
- The optimal strategy to preserve eligibility
- Whether the tax savings from earning more outweigh losing the benefit