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How Does Tax Free Childcare Work and who can Claim it?

Childcare cost in the UK is one of the highest in the world. In 2016, parents spent more than £70,000 for babysitting and childcare alone. This was a 65% increase since 2003. In 2021, the average cost of putting a child in a nursery is £7,000.

In fact, the average cost of sending a child under two to a nursery for 25 hours every week rose to £7,160 in 2021 up from £6,800 in 2020. Child Care services for under two are generally expensive. This is largely due to higher staff ratios.

The good news is there are ways to get financial support depending on your income. When children turn three in the UK, they are usually entitled to free Childcare. Parents can receive 15 hours or 30 hours of free Childcare funded by the government.

Per year, You can get up to £2,000 or up to £4,000 If your child is disabled. Keep reading to learn how to get £2,000 worth of free childcare.

What Is Tax-Free Childcare?

Tax-free Childcare is a government-funded scheme. It offers working families support towards Childcare costs. Instead of paying Childcare costs directly to your provider, use the Tax-Free perk to cover the costs.

For every three months, working families can get up to £500 for each child or up to £2,000 per child every year. For working families with a disabled child, they can get up to £1,000 every three months or up to £4,000.

Basically, for every £8 You pay in your Childcare account, the government will pay £2 to your provider. The scheme is not just for kids aged 2 years but until your child is 11 years old or 16 years If disabled.

How to Use Tax-Free Childcare

Parents can use tax-free Childcare in several ways. Whether you’re working or travelling for business, tax-free Childcare is available for any type of approved Childcare. The UK government counts the following as approved childcare:

  • Nurseries
  • Registered childminders
  • Play schemes
  • Nannies
  • After school clubs
  • Home care worker working for a registered home care agency
  • Holiday clubs and sports activities

Not sure If your Childcare provider is currently approved? In England, You can confirm If your Childcare is approved through Ofsted. In Wales, confirm through Care Inspectorate Wales, and the Scottish Care Inspectorate if living in Scotland.

Parents cannot use tax-free Childcare to pay for private school fees or private tuition during the school day. You cannot get tax free Childcare at the same time If you’re receiving:

  • Universal Credit
  • Child Tax Credit
  • Childcare Vouchers
  • Working Tax Credit

Who Is Eligible for Tax-Free Childcare?

Your eligibility for tax-free Childcare depends on:

  • Your immigration status
  • Your income
  • Your child’s age

If you’re working, You can get tax free childcare, if You or your partner are:

  • On shared maternity, adoption or paternity leave
  • On sick or annual leave
  • In work

If you’re on adoption leave, You cannot apply for tax-free Childcare unless You are going back to work within 31 days. Parents are eligible for tax-free Childcare because of the coronavirus pandemic. If you’re not working and You get Several Disablement Allowance, Incapacity Benefit, Carer’s Allowance, You can apply for the scheme. However, You must start or restart working in the next 31 days.

To qualify for Tax-Free Childcare, You must be earning a certain amount over the next 3 months. This should be at least the National Minimum or Living Wage for 16 hours a week. For example, earn at least £1,853.28, the National Living Wage for people over 23, over the next 3 months. Your partner should earn at least this much.

If you’re living in Switzerland, Iceland, Norway, Liechtenstein or another EU country, You might eligible for tax free Childcare. However, You must be working in the UK before 1st January 2021. The government requires you to show your Worker permit to the Childcare Service as you apply for the scheme.

Adopted children are eligible for the tax free Childcare scheme, but foster children are not. Your child must be 11 or under and living with You to qualify for tax free Childcare. Your child stops being eligible on 1st September after their 11th birthday.

You must include your partner in your application If you’re:

  • Not married or in a civil partnership but living together
  • Married or in a civil partnership and live together

Your partner’s income and employment will not affect your eligibility If they are absent from your household for more than 6 months. If your partner is in prison, he will not affect your eligibility.

How to apply For tax Free Childcare

It takes 20 minutes to apply for tax free Childcare online. You’ll need the following details and those your partner to apply:

  • National Insurance Number
  • Unique Taxpayer Reference, If self-employed

Parents can pay their providers with money from their accounts once it’s shown as “cleared funds.” Payment will show in your provider’s account within 24 hours. As part of the application, You and your partner must be eligible for tax free childcare.

To apply for tax free childcare, head to the GOV.UK site and click “Start Now.” If it’s your first time using this service, You need a Government Gateway account that You can set up using the same service. If you already have an account, sign in with your details.

Remember, You and your partner cannot have accounts for the same child.

Final Thoughts

Before joining the scheme, workout the savings You will make on tax free Childcare. Per child, the maximum amount available is £2,000. To make this saving, you’ll need to have Childcare costs amounting to £10,000 per year per child.

You cannot claim tax-free Childcare together with tax credits, Universal Credit and Childcare Vouchers. If your application is successful, You and your partner will stop receiving a tax credit. Calculate the impact this will have on your household income before joining the tax-free Childcare scheme.