Tax-Free Childcare for the self-employed

While the self-employed have drawn the short straw over the years when it comes to childcare and government support, the Tax-Free Childcare scheme could be just what you’re looking for.

What is the Tax-Free Childcare scheme?

Tax-Free Childcare is a government scheme that offers working families (including the self-employed) support towards childcare costs for kids of 11 years old or younger. You could get up to £500 every three months (£2,000 a year) for each child to put towards approved childcare (including childminders, nurseries and nannies). 

The childcare provider needs to meet certain criteria, be signed up to the government’s scheme, and be registered with a regulator such as Ofsted. As well as approved childcare providers, HMRC also allows the funds to be put towards approved:

• After-school clubs
• Play schemes
• Holiday clubs
• Summer camps.

Who is eligible for Tax-Free Childcare?

The Tax-Free Childcare scheme is available for children aged 11 years or under who usually live with you. They stop being eligible on 1st September after their 11th birthday.

If your child is disabled you may get up to £4,000 a year until they're 17 years of age. They’re eligible for this if they:

• get Disability Living Allowance, Personal Independence Payment or Armed Forces Independence Payment
• are certified as blind or severely sight-impaired.

The really good news is that this is on top of the 30 hours of free childcare already available to all parents of children aged 3 or 4, as long as you’re eligible for both schemes.

Does it matter how much you earn?

If you’re in part-time or full-time employed work, or if you’re a limited company director then you and your partner, if you have one, will need to be earning at least the National Minimum Wage or ‘National Living Wage’ for 16 hours a week on average.

Obviously, the earnings of self-employed people tend to fluctuate, but if this is the case for you, expect to make enough profit in the next three months, you can use an expected average based on how much you expect to make over the current tax year. 

If you or your partner have an ‘adjusted net income’ over £100,000 in the current tax year you won't be eligible. This includes any bonuses you expect to get.

Your adjusted net income is your total taxable income before any personal allowances and minus things like Gift Aid.

How does the Tax-Free Childcare scheme work?

You need to use your online HMRC childcare account to make electronic payments into the scheme. Helpfully, parents, other family members such as grandparents and employers can pay into the account. You can withdraw money to pay for childcare at any time, as long as the provider is registered under this scheme 

The government tops up your contributions at a rate of 20p for every 80p paid in. So a payment of £80 into your childcare account would be topped with an additional £20 from the government to give you £100 to spend on childcare.

The government’s contribution is limited to £2,000 per tax year, per child. The government contribution isn’t all available at once – there’s a quarterly government contribution limit of £500. For disabled children, the annual cap extends to £4,000 (£1,000 per quarter).

It’s worth noting that you can withdraw the money you’ve built up if you need to, but if it's not used for childcare, the Government’s contribution will be withdrawn. Also, the scheme can’t be used if you’re claiming Universal Credit, Working Tax Credit, or Child Tax Credit.If you try to claim Tax-Free Childcare while you’re on tax credits, though, your tax credit claim will end. 

Each account holder must reconfirm their Tax-Free Childcare eligibility every three months. All you need to do is tick a box in your childcare account saying your circumstances haven’t changed – you’ll be sent a reminder several weeks in advance.

How can I apply for Tax-Free Childcare?

You can apply for the scheme on the government website Childcare Choices, where you are able to set up an online account. The Tax-Free Childcare account can only be in one parent's name, so you’ll need to decide who is going to open the account. If you can’t agree then you can both apply, but HMRC will make a decision for you and open one account.

Once the account is open, you can pay into it by direct debit, standing order or bank transfer. It operates like an online savings account  - you contribute depending on how much childcare you’ll need. As highlighted above, the government top up is limited to £2,000 each year and £500 in a three-month period.

If you have any children who are aged under 11 years and usually live with you then you can apply. If your child is disabled and under 17 years old, you can apply.

Once you have a child who is eligible for Tax-Free Childcare, you can sign up other children at the same time.

How does this tie in with the Childcare Voucher scheme?

Parents can’t use Tax-Free Childcare alongside Childcare Vouchers, Universal Credit or tax credits (recipients of these can still sign up for 30 hours of free childcare, though).

New entrants are no longer eligible to claim Childcare Vouchers – these vouchers were closed to newcomers on 4th October 2018. If you’re an employee and already using childcare vouchers, you can continue to use them after this date if your employer is still offering them.

Childcare changes 2023

The government announced 30 hours per week of free childcare (for eligible parents) for up to 38 weeks in a year for children between the ages of 9 months to 3 years. It is expected to phase in from April 2024 with:

• 2 year olds accessing 15 hours per week from April 2024 
• 9 month to 2 year olds getting 15 hours per week from September 2024
• 9 month to 3 year olds getting 30 hours per week from September 2025. 

This is in addition to the 30 hours per week currently received by 3 to 4 year olds.