If you’ve made it this far let me congratulate you on discovering the existence of the tax free childcare scheme in the UK! Childcare costs are a hot topic as we all look for ways to combat the rising cost of living. So, let’s talk about the help available and, specifically, how does tax free child care work?
Every time I talk about tax free childcare, the number of parents who have no idea this scheme exists to help them save money astounds me. An article from Money Saving Expert estimates that around 800,000 of the 1.3 million eligible families are NOT using tax free childcare which is a travesty!
So if you have children in paid childcare, here is everything you need to know…
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- CHECK YOUR OPTIONS FIRST
- WHAT IS TAX FREE CHILDCARE?
- HOW TO GET THE MOST OUT OF TAX FREE CHILDCARE?
- HOW TO CALCULATE THE TAX FREE CHILDCARE ENTITLEMENT PERIOD?
- WHO IS ELIGIBLE FOR TAX FREE CHILDCARE?
- HOW DO I APPLY FOR TAX FREE CHILDCARE?
- CAN I STILL USE TAX FREE CHILDCARE WHEN I AM ON MATERNITY LEAVE?
- CAN I USE TAX FREE CHILDCARE AT THE SAME TIME AS 30 HOURS?
- CAN I USE TAX FREE CHILDCARE FOR WRAPAROUND CARE?
- SUMMARY
CHECK YOUR OPTIONS FIRST
It’s vital that you are aware of and use every tool at your disposal when it comes to childcare costs. The bill for childcare of my 3 year old recently went up by £4 PER DAY – This is on top of the fact that prices were increased twice last year. I don’t have any family support nearby so paying for childcare is a must if I want to continue to work. I’ve already cut down my hours to have one set day off but I’m still left with a hefty bill even after my 30 hours free* (it’s not free – read more about that here).
Before we start it’s important that you have looked at ALL the options and support schemes available to help you with the cost of childcare and you can read a summary of those here as they may be other options which are more cost effective for you.
IMPORTANT: If you are already getting help with childcare costs through other government schemes or claiming certain benefits, applying for the tax free childcare scheme could result in ALL of your benefits being stopped so do seek qualified advice before applying to discover the right option for you.
WHAT IS TAX FREE CHILDCARE?
The tax free childcare scheme is a UK assistance programme in which the goverment will pay 20% of your childcare bill. Yes, you heard me correctly – Tax free childcare allows you to save up to £2000 per year on your childcare bill (this goes up to £4000 per year if your child is disabled). To use tax free childcare you need to ensure that your childcare provider is eligible and signed up to the scheme.
Once your online application is processed and your childcare account is set up, each time you add funds the government will top your account up and for every £8 you pay in, another £2 is added to your account.
In order to pay your childcare bill you need to supply your childcare provider with your tax free childcare payment reference. This can either be found on the initial message you will receive following a successful application (this can be found in the ‘Secure Messages’ section of your account) or alternatively, in the ‘Manage Account’ section of your tax free childcare account under the heading ‘Payments to your childcare provider’.
When you get your childcare bill you can pay your provider from the tax free childcare account by setting up either a monthly or one off payment. To calculate how much you need to add to your account, multiply your total childcare bill by 0.8. This should mean that, after the government top up is added, you will have enough in your account to pay the bill in full.
HOW TO GET THE MOST OUT OF TAX FREE CHILDCARE?
There are some limitations to the tax free childcare scheme as the yearly maximum top up you can gain is £2000 however this is capped to £500 every 3 months (£1000 for children with disabilities). If your childcare bill exceeds £834 per month, be aware that you will still be paying some of the bill without the added top up.
To take advantage of the full £500 quarterly relief available, you need to add £2000 to your account during each 3 month entitlement period. This breaks down to roughly £667 per month for the three months of each entitlement period.
If you DON’T add this amount to your account during the entitlement period, any unused allowance from the £500 maximum top up for that period is lost and cannot be regained. This is incredibly important if you have fluctuating or seasonal childcare costs because adding money each month could ensure you get the maximum relief when the time comes to pay your bills.
HOW TO CALCULATE THE TAX FREE CHILDCARE ENTITLEMENT PERIOD?
Your entitlement period can be found by checking your reconfirmation dates. Every 3 months you must reconfirm your eligibility for the tax free childcare scheme and notify the government of any changes and the entitlement period runs alongside these dates. You can find these dates in the ‘Reconfirmation’ section of your tax free childcare account homepage.
You can check how much of the £500 maximum top up you have left to claim by going from the homepage of your tax free childcare account to ‘Your Tax Free Childcare Account’. Click ‘Manage Account’. Underneath your current balance there will be a message telling you how much you have remaining for the current period. Please be aware that this is not always 100% accurate so it’s useful to keep track of your deposits for the entitlement period to ensure you’re taking full advantage.
WHO IS ELIGIBLE FOR TAX FREE CHILDCARE?
The tax free childcare scheme is aimed at working parents and if you are part of a couple, both of you need to be working with some very limited exceptions.
The minimum expected earnings you need to have for the following 3 months on making an application differ by age and can be found on the gov.uk website here but it works out on average to 16 hours per week based on the national minimum wage.
Those who are self employed after starting a business within the last 12 months and are earning below this threshold may still be eligible.
The upper earnings limit for tax free childcare is more generous than some of the other government schemes at £100,000 net adjusted income per single earner so the majority of UK households that meet the lower earning threshold will be eligible.
HOW DO I APPLY FOR TAX FREE CHILDCARE?
The earliest you can apply for a tax free childcare account is 31 days before your return to work.
To take advantage of this offer you apply to set up an online tax free childcare account via the gov.uk website. You will need to set up a goverment gateway ID and password as part of this process.
If you are applying for a second or subsequent child, you will need to apply for a separate account as each child requires their own unique code.
CAN I STILL USE TAX FREE CHILDCARE WHEN I AM ON MATERNITY LEAVE?
Yes! Many an expectant second time mother (me included) has had a moment of panic wondering if she will still be able to use tax free childcare for their eldest child when on maternity leave. The fact that your earnings may go below the usual threshold does not matter in this circumstance and the gov.uk website clarifies that you will usually be able to continue using the scheme whilst on maternity, paternity, shared parental or adoption leave.
When you come to reconfirm your eligibility during this period the site states ‘It doesn’t matter if you don’t expect to earn this during any weeks you’re on maternity, paternity or adoption leave…’ and goes on to state ‘if you expect to be on these for the next three months select no and continue with your application’. You are later told to select your status as per your employment before going on leave.
CAN I USE TAX FREE CHILDCARE AT THE SAME TIME AS 30 HOURS?
Yes – Again, a lot of parents seem to be unaware that you can use the tax free childcare scheme alongside 30 hours free to double up on savings!
Just be aware that 30 hours ‘free’ might not be the golden ticket you were expecting as you are likely to still have some costs to pay. To find out more about the 30 hours scheme and why ‘free’ doesn’t necessarily mean free, click this link.
CAN I USE TAX FREE CHILDCARE FOR WRAPAROUND CARE?
Yes! Another frequently misunderstood feature of the tax free childcare scheme is that it is not only for pre-schoolers. You can use tax free childcare for children aged 11 and under. This means that you can use the scheme to pay for before and after school care provision and holiday clubs as long as your provider is registered to take part.
SUMMARY
Whatever your views on childcare costs and government support, signing up to the tax free childcare scheme is a no brainer if you are an eligible parent. To get the most out of it, don’t forget to use it alongside 30 hours if this applies to you and take advantage from the time your child enters paid childcare all the way through to age 12 when using wraparound or seasonal paid care!
It’s also so important to talk to your friends, co-workers and other parents to make sure that they’re aware of and using this scheme if they are eligible.
Happy Budgeting!
Leigh