Sometimes the thought of working when you have a young child at home can seem counter productive. After all childcare isn’t cheap and depending on an individuals earning potential the cost of childcare can put a significant dent in what ends up in your pocket. Luckily HMRC recognise this dilemma that many face and can often assist via their tax free childcare scheme which we will be looking at in some detail throughout this article.
How Does It Work?
The tax free childcare scheme from HMRC allows qualifying individuals to deposit funds into a tax free childcare account using a government gateway login. The account is then topped up by HMRC, after which the money can be spent with approved childcare providers. The top up amount is the equivalent of basic rate tax relief which means that for every £8 deposited by the individual HMRC will contribute £2. HMRC’s contribution could be as much as £500 every 3 months (£2,000 per year) for each child. If your child has a disability then this amount is increased further to a maximum of £1,000 every 3 months (£4,000 per year).
You must check with your childcare provider to ensure they are signed up to the scheme. If a childcare provider is not signed up to the tax free child care scheme they will not be able to receive payments from your account.
Childminders, nurseries, nannies, after school clubs and play schemes can all be paid for using funds from the scheme.
If you also qualify for 30 hours free childcare available to 3 & 4 year olds in England you can use the tax free childcare scheme at the same time although there are some other schemes and benefits that you are not permitted to claim at the same time which we will explore below.
Work & Income Requirements
The majority of people will need to be working and expecting to earn at least the national minimum wage or living wage for an average of 16 hours per week across the next 3 months. If you have a partner they will also need to meet these requirements. This means the income requirements will depend primarily on your age. For example, someone over the age of 25 earning the national living wage would need to expect to earn at least £1,813.76 in the next 3 month period. Those on sick leave, annual leave, shared parental leave, maternity leave, paternity leave, and adoption leave should also qualify although for adoption leave you will need to be returning to work within 31 days of application.
If you’re not working but your partner is then you may still qualify if you’re claiming incapacity benefit, severe disablement allowance, carer’s allowance or contribution-based employment and support allowance.
For those who are waiting to start work you can also apply within 31 days of starting or restarting work.
Those that are self employed who struggle to meet the income requirements above for the next 3 months can take an average from how much profit they expect to make in the current tax year instead. This is because the earnings of the self employed tend to fluctuate a lot more. Where the self employment has commenced within the past 12 months the earnings limit will not apply.
If either you or your partner are a high earner with expected adjusted net income over £100,000 in the current tax year then you will not be eligible to apply for the tax free childcare scheme although there are currently some exceptions to this due to COVID-19 which you will find detailed below.
A Qualifying Child
In order to qualify for the tax free childcare scheme from HMRC your child must usually live with you and be 11 years old or younger. They will no longer be eligible for the scheme from the 1st September following their 11th Birthday.
As previously mentioned if your child is disabled you may be able to benefit from an increased contribution from HMRC up to £4,000 per year. On top of this they may also be eligible for a longer period of time, right up until they’re 17 years old.
Immigration Status
Most UK residents will be eligible to apply but those from outside the EEA whose resident card states they cannot access public funds will not be eligible but where your partner is from the UK or EEA then they will be able to apply instead. Even if they are from outside the EEA they will be eligible providing their resident card doesn’t specify that they can’t access public funds.
Other Benefits
The tax free childcare scheme cannot be utilised at the same time as certain other schemes and benefits such as working tax credits, child tax credits, universal credit or childcare vouchers. HMRC provide detailed guidance on when you would need to cancel these other schemes in order to receive the tax free childcare and they also have a childcare calculator to help you determine which type of support is better for your situation.
COVID-19
The coronavirus pandemic has had a significant impact on peoples ability to work and as a result HMRC have published the following additional guidance regarding some of the qualifying criteria:
- Where you are temporarily working less than normal you may still be eligible to claim providing you are either on furlough through the coronavirus job retention scheme or you’re claiming a self employed income support grant
- Where you or your partner are a critical worker and are exceeding the upper limits of the income threshold (£100,000) due to working increased hours during the coronavirus pandemic HMRC will extend the upper limit to £150,000
How To Apply For The Tax Free Childcare Scheme
You can apply for the tax free childcare scheme online. When making the application you must include your partner in your application if:
- You are married or in a civil partnership and live together
- Not married or in a civil partnership but living together as though you are
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Adam Hill
Practice based accountant with over 10 years experience, specialising in SME's, Freelancers and Personal Tax. "I take pride in proactively recognising tax planning opportunities on behalf of clients to help them operate more efficiently."
