{"id":6356,"date":"2019-05-28T11:48:33","date_gmt":"2019-05-28T10:48:33","guid":{"rendered":"https:\/\/www.sage.com\/en-gb\/blog\/?p=6356"},"modified":"2026-01-29T10:24:24","modified_gmt":"2026-01-29T10:24:24","slug":"tax-free-childcare-payroll","status":"publish","type":"post","link":"https:\/\/www.sage.com\/en-gb\/blog\/tax-free-childcare-payroll\/","title":{"rendered":"Tax-Free Childcare: What it means for your payroll"},"content":{"rendered":"
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\n\t\t\t\t\t\t\tMoney Matters<\/a>\t\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t
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\n\t\t\t\t\t\tTax-Free Childcare: What it means for your payroll\t\t\t\t\t<\/h1>\n\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t

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\n\t\t\t\n\t\t\t\t\"\"\t\t\t\tSally Percy<\/span>\n\t\t\t<\/a>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n<\/div>\n\n\n\n

Working parents make an important contribution to the UK labour force and they can benefit from a number of different government initiatives that help them to cover their childcare costs, including Tax-Free Childcare.<\/p>\n\n\n\n

As an employer, Tax-Free Childcare has implications for your payroll, particularly if your employees who are parents choose to switch to the arrangement from the previous childcare voucher scheme.<\/p>\n\n\n\n

You are also likely to face questions from employees about the pros and cons of each scheme.<\/p>\n\n\n\n

This article looks at the questions that are likely to arise and will equip you with the answers to advise your employees on the different childcare schemes and how they work.<\/p>\n\n\n\n

What is Tax-Free Childcare?<\/h2>\n\n\n\n

Tax-Free Childcare, which is administered by HMRC, is a government initiative that’s intended to support working parents with the cost of childcare.<\/p>\n\n\n\n

First introduced in 2017, it’s a replacement for the existing childcare voucher scheme, which closed to new entrants on 4 October 2018.<\/p>\n\n\n\n

How does Tax-Free Childcare work?<\/h2>\n\n\n\n

The HMRC Tax-Free Childcare scheme is based on the principle that for every 80p a working parent puts into a designated online account, the state will add an extra 20p.<\/p>\n\n\n\n

Effectively, the scheme is refunding the parent’s basic-rate tax on his or her childcare contribution \u2013 which is how the scheme gets its name.<\/p>\n\n\n\n

The tax relief is only available on the first \u00a310,000 of childcare costs per child.<\/p>\n\n\n\n

With Tax-Free Childcare, working parents can get up to \u00a3500 per child from the UK government every three months \u2013 up to a maximum of \u00a32,000 per year \u2013 to help cover the cost of approved childcare<\/a>.<\/p>\n\n\n\n

Approved childcare includes au pairs, breakfast clubs, childminders, nannies, nurseries and playgroups.<\/p>\n\n\n\n

Who is eligible for Tax-Free Childcare?<\/h2>\n\n\n\n

In order to qualify, a parent must be in work and have a child aged 11 or under who is usually living with them.<\/p>\n\n\n\n

If there are two parents in the household, they both must be in work. The parent or parents must also earn at least \u00a3125.28 per week and cannot receive any tax credits, Universal Credit<\/a> or employer-supported childcare such as childcare vouchers.<\/p>\n\n\n\n

Parents aren’t eligible to claim Tax-Free Childcare if either partner has a taxable income above \u00a3100,000.<\/p>\n\n\n\n

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Download your free copy of The ultimate guide to payroll compliance<\/a><\/div>\n<\/div>\n\n\n\n

What is the childcare voucher scheme?<\/h2>\n\n\n\n

The childcare voucher<\/a> scheme is the predecessor arrangement to Tax-Free Childcare. It’s a salary sacrifice scheme offered voluntarily by employers.<\/p>\n\n\n\n

With this scheme, parents sacrifice part of their salary in exchange for childcare vouchers of an equal amount in value. The scheme affects payroll<\/a> because parents who participate in it don’t pay tax or National Insurance on the amount that they sacrifice for childcare vouchers, up to a certain limit.<\/p>\n\n\n\n

The vouchers they earn through the scheme can be used to cover the costs of registered childcare providers.<\/p>\n\n\n\n

Although the scheme is now closed to new entrants, employers are still able to provide childcare vouchers to employees who were registered before the scheme’s cut-off date of 4 October 2018.<\/p>\n\n\n\n

The childcare voucher arrangement operates on a per-employee basis, rather than a per-child basis. So, a working parent who is a basic-rate taxpayer can buy \u00a3243 worth of childcare vouchers per month. Between them, two working parents could therefore buy \u00a3486 worth of childcare vouchers per month.<\/p>\n\n\n\n

Each parent benefits from an annual tax and National Insurance saving of up to \u00a3933. Higher-rate taxpayers can spend up to \u00a3124 per month each on childcare vouchers and benefit from an annual tax and National Insurance saving of up to \u00a3625.<\/p>\n\n\n\n

Additional-rate taxpayers can spend \u00a3110 per month on childcare vouchers, and benefit from an annual tax and National Insurance saving of up to \u00a3623.<\/p>\n\n\n\n

Read more about payroll<\/strong><\/p>\n\n\n\n