Tax-free childcare scheme

(3 minutes to read)

The tax-free childcare scheme is a government initiative to provide relief on the costs of childcare, which replaced the childcare vouchers scheme on 4th October 2018.

How does the Tax-free Childcare Scheme work?

To take advantage of the scheme, you’ll need to sign up. This gives you access to an online childcare account, which you can use to pay for childcare costs.

For every £8 you put into the account, the government will top it up with £2 – so for £8 worth of contributions, you’ll get £10 towards childcare costs. This 20% benefit is the same as the basic rate of tax that most of us pay, hence the “tax-free” childcare scheme.

For each child, you can get up to £500 per quarter (£2,000 a year) in tax-free childcare benefit – including your contributions, that’s equivalent to £10,000 total childcare costs in a year. If your child is disabled, the maximum benefit doubles to £4,000 a year.

What are the restrictions?

There are restrictions on who can benefit from the scheme, and also on what providers you can use.

As an anti-abuse measure, childcare providers must also be signed up to the scheme – this requires registering with a regulator such as Ofsted, and also with the scheme itself.

Although providers are able to accept payments through both the tax-free childcare account and the old childcare vouchers scheme, parents can’t mix-and-match – so if you’re still on the old voucher scheme through your employer, you may wish to switch.

As for parents themselves, the following restrictions apply:

  • Both parents must be in work (unless in receipt of ESA, Carer’s Allowance, Severe Disablement Benefit or Incapacity Benefit.
  • Working parents must work at least 16 hours per week and earn at least National Minimum/Living Wage (as applicable).
  • If you’re self-employed, you’re still eligible – but you’ll need to meet the same weekly earnings criteria on a three-month average.
  • Your child is under 12 (or under 17 if disabled)
  • Neither parent can earn over £100,000 a year.
  • The child must live with you in order to qualify. Foster children are not eligible, although adopted children are.
  • You and your partner cannot be in receipt of Working Tax Credit, Child Tax Credit or Universal Credit.

What else should I consider?

Before applying for the scheme, make sure you’re registered for your free childcare if your child is 3-4 years old. You’re entitled to 15 hours of free nursery care per week for 38 weeks – and this doubles to 30 hours if both you and your partners meet the earnings criteria above.

If you’re already in receipt of Child or Working Tax Credits (in an area where Universal Credit hasn’t been rolled out), the maximum benefit is greater than the benefit under the tax-free childcare scheme – so it’s better to stick with these if applicable.

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