Tax-Free Childcare for the self-employed

Posted on May 10th, 2018 | Tax

Crunch - Tax-Free Childcare for the self-employed - Children Raising Hands

For years, the self-employed have drawn the short straw when it comes to getting help looking after kids. But don’t despair the Tax-Free Childcare scheme could be just what you need if you’re the self-employed.

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. You could get up to £500 every three months (£2,000 a year) for each child to put towards approved childcare – the provider needs to meet certain criteria and be signed up to the scheme.

Who is eligible for Tax-Free Childcare

The really good news is that this is on top of the 30 hours of free childcare as long as you’re eligible for both.

The scheme is available for children 11 or under who usually live with you, or under 17 if the child is registered disabled. Working parents living in the UK will qualify for the scheme, provided they’re earning at the National Minimum Wage or Living Wage for at least 16 hours a week (for the 2018/19 tax year that’s at least £125.58 a week if you’re over 25.)

However, if you’re newly self-employed, you’ll benefit from the ‘start-up’ period of twelve months, in which you won’t be required to earn the minimum income level. A new start-up period will be available every five years.

How does the Tax-Free Childcare scheme work?

To cover the 20% VAT usually charged on top of services (hence the ‘Tax-Free’ in the name), the Government will top up every payment of 80p with an extra 20p up to the equivalent of £2,000 per tax year, per child.

For instance, a payment of £160 into the account would generate an extra £40.

The £2,000 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.

Parents need to set up a Government Gateway account with HMRC, which they (or other family members) can then pay money into at any point. The account balance can be withdrawn and used for childcare whenever the account holder likes, as long as the provider is registered under this scheme (many thousands of providers have already signed up).

It’s worth noting that you can withdraw the money you’ve built up if you need to, but if you do, the Government’s contribution will be withdrawn. Also, the scheme can’t be used if you’re claiming Universal Credit, Working Tax Credit, Child Tax Credit or childcare vouchers.

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

The childcare provider must be registered with a regulator such as Ofsted.

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 setup an online account, which is maintained by one parent only. This operates like an online savings account with the ability to either pay more or less into it depending on how much childcare you’ll need, especially over summer breaks, for example.

If you have any children who are aged under 11 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 any other children at the same time.

High earners of £100,000 and above aren’t eligible for the scheme. A family with an income less than £46,000 have a much greater chance of qualifying for the scheme.

The eligibility for voucher scheme does not guarantee eligibility for Tax-Free childcare.

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.

Join Crunch Chorus:
The free community for the self-employed

You'll get access to a range of benefits, such as invoice software, jargon-free business guides, great networking opportunities, discounts, plus much more

Written by Tom West

Useful tools and resources

Business guides

From understanding expenses to starting a limited company, we've a range of jargon-free business guides for you to download and keep.

Invoicing software and templates

Create, send and store sole trader invoices in a snap with our free invoice software. You can also download a selection of invoice templates for all business types.

Take-home pay calculator

Use our Take-Home Pay Calculator to work out your true earnings and see if you could save money with a different company set up.