Sarah Laing reminds working parents and guardians to check their eligibility for tax-free childcare.
Recent guidance issued by HMRC explains how to request a review of a tax-free childcare or 30 hours free childcare application, where the applicant disagrees with a decision that they are not eligible.
Missing out?
Many working parents and guardians could be missing out on up to £2,000 per child, per year towards the cost of childcare.
Broadly, eligible claimants can receive government top-ups of £2 for every £8 that they pay into a tax-free childcare account, up to a maximum of £2,000 per child, although there is an overall maximum limit of £10,000. Additional support for parents of a disabled child is available in acknowledgment of the fact that they usually have higher childcare costs. These parents can pay up to £16,000 into their childcare account per year and receive government top-up payments of up to £4,000.
How does it work?
The scheme is open to all working parents across the UK with children under 12, or under 17 if disabled.
Under the scheme, the parent/guardian opens an online account via the government’s Childcare Choices website and decides how much to pay in and how often. The flexible nature of accounts means that account holders can pay in more in some months, and less at other times, depending on how much they have available to invest. The rules also allow anyone to pay into the account, including grandparents, other family members or employers.
The account holder’s circumstances are re-confirmed online every three months. Money can be withdrawn at any time, but the government contribution will be lost.
Who is eligible?
To qualify for the government contribution, account holders will usually have to be in work, expecting to earn at least the national minimum wage (NMW) or national living wage (NLW) for 16 hours a week on average, over the next three months. From April 2020, this equates to at least £1,813.76, which is equivalent to the NLW for people over 25.
Where an individual is not working, they may still be eligible for tax-free childcare if their partner is working, and they receive incapacity benefit, severe disablement allowance, carer’s allowance or employment and support allowance. It is also possible to apply where the claimant is starting or re-starting work within the next 31 days.
Self-employed people who do not expect to make enough profit in the next three months can use an average of how much they expect to make over the current tax year. Additionally, the earnings limit does not apply to self-employed individuals who started their business less than twelve months ago.
Where the individual or their partner has an ‘adjusted net income’ over £100,000 in the current tax year, they will not be eligible for tax-free childcare.
Broadly, ‘adjusted net income’ is the total taxable income before any personal allowances and minus things like gift aid. It is also worth noting that the £100,000 limit includes any expected bonuses.
It is not possible to receive tax-free childcare at the same time as claiming working tax credit (WTC), child tax credit (CTC), universal credit (UC) or childcare vouchers. Which scheme the individual is better off with depends on their situation. The Childcare Choices website includes a childcare calculator for parents to compare all the government’s childcare offers and check what works best for their families, including the 30-hour free childcare offer, tax-free childcare or universal credit.
Anyone who pays for childcare would be wise to check their eligibility for tax-free childcare, as they could be missing out on considerable financial support.
Practical tip
Checks on eligibility for tax-free childcare can be made via the government’s Childcare Choices website (www.childcarechoices.gov.uk/), and remember to ask HMRC to review any claim that is turned down (see www.gov.uk/guidance/challenge-a-childcare-service-application-decision for guidance on this). HMRC has a duty to respond within 30 days of a review being requested (or up to 45 days where further information is needed).
