Complete Guide to UK Childcare Benefits
All tax calculations in this guide use 2025/26 tax year rates and thresholds.
Childcare in the UK is expensive, often over £1,000 per month for full-time nursery. The good news? The government offers several schemes to help, and you can often combine them. The bad news? They're complicated, and high earners face harsh cliff edges where earning slightly more can cost you thousands in lost benefits.
This guide explains all the childcare benefits available, who qualifies, how they work together, and, most importantly, how to avoid the traps that catch thousands of families every year.
The Three Main Childcare Benefits
| Benefit | What You Get | Who Qualifies | Income Limit |
|---|---|---|---|
| Tax-Free Childcare | 25% government top-up on childcare payments (max £2,000/year per child) | Working parents with children under 12 | Each parent under £100,000 |
| Free Childcare Hours | 15-30 hours/week of funded childcare (depending on age) | All 3-4 year olds get 15 hours; working parents get more | Each parent under £100,000 for extended hours |
| Childcare Vouchers | Up to £933/year tax saving per parent (£1,866 for higher-rate taxpayers) | Only if you joined before October 2018 | None |
Tax-Free Childcare: The 25% Government Top-Up
How It Works
Think of this as the government giving you a 25% discount on childcare. You open an online account, pay money in for nursery fees, and the government automatically adds 25% extra. Pay in £800, they add £200, you have £1,000 to spend.
The maximum government contribution is £2,000 per child per year (£4,000 for disabled children). That means if you spend £10,000+ on childcare annually, you get the full £2,000 benefit. If you spend less, you get 25% of whatever you spend.
Who's Eligible?
- Your child is under 12 (or under 17 if disabled)
- You and your partner (if you have one) both work
- Each of you earns at least £8,788/year
- Neither of you earns over £100,000/year
This is an all-or-nothing benefit. If either parent earns £100,000 or more in a quarter, you lose Tax-Free Childcare for that entire quarter. Earning £99,999 = fully eligible. Earning £100,001 = lose it all.
With two children, crossing £100k can cost you £4,000/year in lost benefits. We'll show you how to avoid this below.
Free Childcare Hours: Government-Funded Nursery Time
How It Works
The government pays your nursery or childminder directly for a set number of hours per week during term time (38 weeks/year). You can "stretch" this across the full year if you prefer (same total hours, but fewer per week year-round).
What You Get by Age
| Child's Age | All Families | Working Parents | Annual Value (approx) |
|---|---|---|---|
| 9 months - 2 years | 0 hours | 15 hours/week | ~£4,000 |
| 2-3 years | 0 hours | 15 hours/week | ~£4,000 |
| 3-4 years | 15 hours/week (universal) | 30 hours/week | ~£4,000 or ~£8,000 |
The "universal" 15 hours for 3-4 year olds has no income test. Every family gets it regardless of earnings or working status. The extended hours (15 for under-3s, or the extra 15 to make 30 for 3-4 year olds) require both parents to be working and earning under £100,000 each.
Free childcare hours use the same £100,000 limit as Tax-Free Childcare. Cross that threshold and you lose both benefits simultaneously. For a family with a 2-year-old, this could mean losing £4,000 in free hours plus £2,000 in Tax-Free Childcare = £6,000 total.
Childcare Vouchers: The Old Scheme (Closed to New Joiners)
If you joined a childcare voucher scheme through your employer before October 2018, you can keep using it. New people can't join any more, but if you're already in, it might be better than Tax-Free Childcare.
How It Compares
| Scenario | Tax-Free Childcare | Childcare Vouchers | Winner |
|---|---|---|---|
| Basic-rate taxpayer, 1 child, 2 parents | £2,000/year max | £1,866/year (£933 each) | Tax-Free Childcare |
| Higher-rate taxpayer, 1 child, 2 parents | £2,000/year max | £3,732/year (£1,866 each) | Childcare Vouchers |
| Higher-rate taxpayer, 2+ children | £4,000+/year | £3,732/year (same amount regardless) | Tax-Free Childcare |
| Income over £100,000 | Not eligible | Still eligible (no income limit) | Childcare Vouchers |
You can't have both. If you switch from vouchers to Tax-Free Childcare, you can't switch back. Do the maths carefully before switching.
How the Benefits Work Together
The good news: Tax-Free Childcare and free childcare hours work together perfectly. Use your free hours, then use Tax-Free Childcare to pay for additional hours or wraparound care.
Scenario: Working parents, 3-year-old in nursery full-time (50 hours/week)
Cost: £8/hour = £400/week = £1,600/month
What you get:
- Free hours: 30 hours/week government-funded
- Remaining paid hours: 20 hours/week = £160/week = £640/month
- Annual paid childcare: £7,680
Tax-Free Childcare benefit:
- You spend £7,680
- Government adds 25%: £1,920
- Total: £9,600
Your actual cost: £7,680 (instead of £19,200 without any benefits)
Total benefit: £11,520/year (£7,680 in free hours + £1,920 Tax-Free Childcare)
The £100,000 Cliff Edge: How to Avoid It
The single biggest trap in UK childcare benefits is the £100,000 income limit. It applies to both Tax-Free Childcare and extended free childcare hours. Cross it, and you lose both instantly.
What "£100,000" Means
It's your adjusted net income, i.e. roughly your gross salary minus:
- Pension contributions (including salary sacrifice)
- Gift Aid charitable donations
- Trading losses (if self-employed)
Strategy 1: Pension Contributions
This is the most effective strategy. If you earn £105,000 and pay £5,000 into your pension, your adjusted net income is £100,000 and you stay eligible.
Salary sacrifice pensions work best because they reduce your gross salary before it's tested for childcare benefits. Plus you save National Insurance too.
The November 2025 Budget signalled that from April 2028 the NI saving on salary sacrifice pension contributions will be capped. Income tax relief and the adjusted net income reduction should remain, but the NI boost may shrink above a threshold. Keep using pensions to stay under £100k, but expect reduced NI upside and check employer scheme updates in advance of 2028.
Gross salary: £105,000
Salary sacrifice pension contribution: £6,000/year (£500/month)
Adjusted net income: £99,000
Benefits preserved:
- Tax-Free Childcare (2 children): £4,000
- Free childcare hours (15 hours for 2-year-old): ~£4,000
- Total: £8,000
Cost of £6,000 pension contribution:
- Take-home reduction: £2,480 (after 40% tax + regained personal allowance + 2% NI relief)
- Pension pot increase: £6,000
Net position: £2,480 less cash in hand, keep £8,000 benefits, gain £6,000 pension savings
Strategy 2: Timing Bonuses
Tax-Free Childcare is assessed quarterly, and free childcare hours are reconfirmed every 3 months. If you get a large annual bonus, consider:
- Deferring it to the next tax year if possible
- Paying it into your pension (reducing adjusted net income)
- Accepting you'll lose benefits for one quarter only (not the whole year)
Strategy 3: Split Income (Contractors Only)
If you're a contractor running a limited company, you have flexibility in how you take income (salary vs dividends). If one partner earns £120,000 and the other earns £40,000, restructuring through dividends or other arrangements might help both stay under £100,000.
Income splitting has tax and legal implications. Always consult an accountant before restructuring your income to preserve childcare benefits.
Common Scenarios: What Benefits Do I Get?
Scenario 1: Both Parents Earn £50,000, One 3-Year-Old
- ✅ Free childcare hours: 30 hours/week (~£8,000 value)
- ✅ Tax-Free Childcare: Up to £2,000
- ❌ Childcare vouchers: Not available (unless joined before 2018)
Total benefit: Up to £10,000/year
Scenario 2: One Parent Earns £90,000, Other Doesn't Work, One 2-Year-Old
- ❌ Free childcare hours: Need both parents working
- ❌ Tax-Free Childcare: Need both parents working
- ❌ Childcare vouchers: Not available (unless joined before 2018)
Total benefit: £0 (but you get universal 15 hours when child turns 3)
Scenario 3: Both Parents Earn £95,000, Two Children (Ages 2 and 4)
- ✅ Free childcare hours: 15 hours/week for 2-year-old (~£4,000) + 30 hours/week for 4-year-old (~£8,000)
- ✅ Tax-Free Childcare: Up to £4,000 (£2,000 per child)
- ❌ Childcare vouchers: Not available (unless joined before 2018)
Total benefit: Up to £16,000/year
Scenario 4: One Parent Earns £110,000, Other Earns £60,000, One 3-Year-Old
- ⚠️ Free childcare hours: Only universal 15 hours (~£4,000), extended 15 hours lost due to £100k limit
- ❌ Tax-Free Childcare: Not eligible (one parent over £100k)
- ✅ Childcare vouchers: Still eligible if already enrolled
Lost benefit: ~£6,000/year (lost 15 hours + £2,000 Tax-Free Childcare)
Consider: £10,000 pension contribution to bring higher earner under £100k threshold
How to Apply
Tax-Free Childcare and Free Childcare Hours
You apply for both through the same government website: Childcare Choices
- Answer questions about your family and income
- Get instant decision on what you're eligible for
- Receive your Tax-Free Childcare account (if eligible)
- Receive your free hours code to give to your provider (if eligible)
- Reconfirm eligibility every 3 months
You must reconfirm every 3 months or you lose your benefits. Set a calendar reminder. If you miss the deadline, you'll have to reapply and there may be gaps in your childcare funding.
Childcare Vouchers
If your employer still offers them (only for people who joined before October 2018), you sign up through your employer's payroll or HR system. The vouchers come out of your gross salary before tax.
Common Questions
Can I get both Tax-Free Childcare and free childcare hours?
Yes! They're designed to work together. Use your free hours first, then use Tax-Free Childcare to pay for additional hours or wraparound care (before/after nursery hours).
What if my income fluctuates around £100k?
Benefits are assessed quarterly. If you go over £100k in one quarter, you lose benefits for those 3 months only. You can reapply next quarter if you're back under. Track your income carefully and use pension contributions to smooth out spikes.
Is the £100k limit per person or combined?
Per person. If you earn £90k and your partner earns £90k (£180k combined), you're still eligible. But if either of you earns £100k+, you're out.
Should I switch from childcare vouchers to Tax-Free Childcare?
It depends. If you're a higher-rate taxpayer with one child, vouchers might be better (£3,732 for two parents vs £2,000). If you have multiple children or earn over £100k, Tax-Free Childcare or staying with vouchers may be better. You can't switch back, so calculate carefully.
What if only one of us works?
You can't get Tax-Free Childcare or extended free childcare hours, both require both parents to be working (or one parent if you're a single parent). You do get the universal 15 hours once your child turns 3, regardless of working status.
I'm self-employed with variable income, how does the £100k test work?
HMRC looks at your self-assessment tax return. They use your adjusted net income from the most recent return. If your income varies significantly year-to-year, you might be eligible some years and not others. You reconfirm quarterly, so HMRC can check updated information.
What happens when my child turns 5 and starts school?
Free childcare hours end (they're in school now, which is also free). Tax-Free Childcare continues until they turn 12, so you can use it for wraparound care (breakfast club, after-school club, holiday clubs).
How Our Calculator Helps
Our tax calculator automatically identifies when your income approaches the £100,000 threshold and shows you:
- Whether you're at risk of losing childcare benefits
- The total value of benefits you'd lose
- How much pension contribution would keep you under the threshold
- The optimal strategy to preserve maximum benefits whilst building retirement savings
- Your net position after accounting for tax relief, NI savings, and preserved benefits
Enter your income, partner's income, and number of children (with ages), and the calculator will flag any cliff edges and suggest the best approach for your situation.
Key Takeaways
- Tax-Free Childcare gives you a 25% government top-up (max £2,000/year per child)
- Free childcare hours give you 15-30 hours/week of funded childcare depending on your child's age
- Both benefits work together, you can use both free hours and Tax-Free Childcare
- Both benefits cut off completely if either parent earns £100,000+ (harsh cliff edge)
- Pension contributions reduce your adjusted net income and can preserve eligibility
- Budget 2025: salary sacrifice NI saving expected to be capped from April 2028—adjust forecasts
- If you have old childcare vouchers and earn over £100k or are a higher-rate taxpayer with one child, keep them
- The universal 15 hours for 3-4 year olds has no income test, everyone gets it
- Reconfirm your eligibility every 3 months or you'll lose benefits