Tax-Free Childcare: How the 20% Top-Up Works and Who Can Get It

Tax-Free Childcare is a government top-up scheme: for every £8 you pay into an online childcare account, the government adds £2, up to £500 per child every three months (£2,000 a year, or £4,000 for a disabled child). You can use it for any Ofsted-registered or equivalent childcare provider who has signed up, from nurseries and childminders to after-school clubs and holiday camps. The catch is the eligibility test: both parents must be working and earning at least a minimum amount, and neither can have an adjusted net income above £100,000.

Key points

• The top-up is a flat 20% of what you pay — £8 in, £2 added, £10 to spend on childcare.
• Maximum top-up is £500 per child per quarter (£2,000 a year). For a disabled child it doubles to £1,000 per quarter (£4,000 a year).
• Children qualify from birth until the 1 September after their 11th birthday, or 16th if disabled.
• £100,000 is a cliff edge, not a taper. One pound over and the whole household loses the top-up — and, in England, the funded hours too.
• You cannot hold Tax-Free Childcare and Universal Credit at the same time, and you must reconfirm your details every three months.

£2 for every £8: how the top-up works

You open a childcare account through the government's childcare service. You (or grandparents, or anyone else) pay money in, HMRC adds 20% within seconds, and you pay your provider straight from the account. The 20% is calculated on the amount you deposit, so the government contribution is a fifth of the total pot — the same maths as basic-rate tax relief.

The caps are per child and per quarter, and unused allowance does not roll over neatly — if you pay nothing in during one quarter, you cannot double up the next. Families with lumpy costs (a big summer holiday club bill, say) are better off paying in steadily across the year.

Worked example: a typical nursery bill

Rachel and Tom pay £800 a month for their two-year-old's nursery place. They set up a standing order of £640 a month into the childcare account. The government adds £160 each month, giving the £800 they need.

• Paid in over the year: £640 × 12 = £7,680
• Government top-up: £160 × 12 = £1,920
• Childcare paid for: £9,600

Their top-up of £1,920 sits just under the £2,000 annual cap, and £480 per quarter is under the £500 quarterly cap, so they get every penny. If the nursery bill rose to £1,000 a month, the top-up would be capped at £500 a quarter and they would fund the excess themselves.

Eligibility: who can get Tax-Free Childcare

Both you and your partner (if you have one) must normally meet all of these tests. If you are a single parent, only your own circumstances count.

The work and earnings test

Each working parent must expect to earn at least the equivalent of 16 hours a week at the National Living Wage over the next three months — roughly £2,600 a quarter for someone aged 21 or over.. Earnings from employment, self-employment or a company directorship all count.

There are sensible exceptions. If you are newly self-employed you do not have to meet the minimum income test in your first 12 months of trading. You also still qualify while on sick leave or statutory maternity, paternity, adoption or shared parental leave. And if one parent works while the other receives Carer's Allowance, Incapacity Benefit, Employment and Support Allowance or certain disability benefits, the non-working parent is treated as meeting the test.

The child test

The child must be under 12 — eligibility runs until the 1 September following their 11th birthday. For a child who is disabled and receives Disability Living Allowance, Personal Independence Payment, Child Disability Payment or is certified as severely sight impaired, it runs to the 1 September after their 16th birthday, with the doubled £4,000 annual cap.

Who is not eligible

• Anyone in the household earning over £100,000 adjusted net income in the tax year. This is the most common reason for losing it.
• Universal Credit claimants. You cannot receive both. Successfully applying for Tax-Free Childcare ends a Universal Credit award.
• People using employer childcare vouchers or a workplace directly-contracted childcare scheme. You can switch to Tax-Free Childcare, but you must tell your employer to stop the vouchers within 90 days.
• Parents who do not work, or earn below the minimum income threshold, unless one of the exceptions above applies.
• Parents without the right immigration status. You need a National Insurance number, and you or your partner must be a British or Irish citizen, have settled or pre-settled status, or have permission to stay that includes access to public funds. Families with a no recourse to public funds condition generally cannot claim.
• Unregistered childcare. Your provider must be regulated (Ofsted in England, the Care Inspectorate in Scotland, CIW in Wales, or the relevant health and social care trust in Northern Ireland) and signed up to the scheme.

The £100,000 cliff edge

If either parent expects an adjusted net income above £100,000 in the tax year, the whole family loses Tax-Free Childcare. There is no taper and no partial award. A household where one parent earns £101,000 and the other earns nothing gets nothing; a household where both earn £95,000 — £190,000 between them — keeps the full top-up.

Adjusted net income is your total taxable income minus personal pension contributions (grossed up) and Gift Aid donations. That matters, because it means the figure is partly within your control. A pension contribution or a charitable donation reduces adjusted net income pound for pound.

Worked example: buying your way back under £100,000

Priya expects £105,000 of salary this year and lives in England. Her two children are in childcare, so the family is in line to lose £4,000 of top-ups (£2,000 each) plus, in England, the funded hours. She makes a £5,000 gross personal pension contribution, bringing her adjusted net income to exactly £100,000.

• Tax at £105,000: Personal Allowance is tapered to £10,070 (£12,570 less half of the £5,000 excess), so taxable income is £94,930. Tax = £37,700 × 20% + £57,230 × 40% = £7,540 + £22,892 = £30,432.
• Tax at £100,000: full £12,570 allowance, taxable income £87,430. Tax = £7,540 + (£49,730 × 40%) = £27,432.
• Tax saved: £3,000 on a £5,000 contribution — an effective 60% rate of relief.

So £5,000 goes into her pension at a real cost of £2,000, and the family keeps £4,000 of childcare top-ups plus the funded hours. That 60% band between £100,000 and £125,140 is explained in full in our guide to the 60% tax trap. If you are near the line, our £100,000 escape-plan check works out how far over you are and what it would take to get back under.

Scottish taxpayers face an even sharper version. Non-savings income between £100,000 and £125,140 is taxed at the 45% advanced rate while the Personal Allowance is being withdrawn, giving an effective marginal rate of 67.5%. The same £5,000 contribution would save £3,375 in tax, so the net cost is £1,625.

"30 hours over £100k" — what happens to the funded hours

In England, the funded early years hours for working parents use the same £100,000 adjusted net income test as Tax-Free Childcare, and the same all-or-nothing rule. Go over, and you lose both at once, which is why the cliff can be worth far more than the £2,000 top-up on its own. The two schemes are reconfirmed through the same childcare account.

Scotland is different: the funded hours for three and four-year-olds (and eligible two-year-olds) are not income-tested, so a high earner in Scotland loses the Tax-Free Childcare top-up but keeps the funded hours. Wales and Northern Ireland run their own offers with their own rules.

Tax-Free Childcare vs Universal Credit childcare

You have to choose. Universal Credit can refund up to 85% of what you actually spend on childcare, subject to monthly caps, whereas Tax-Free Childcare is a flat 20%. For lower-income families, Universal Credit is usually far more generous — 85% against 20% is not a close contest.

The practical warning: applying successfully for Tax-Free Childcare terminates a Universal Credit claim, and you cannot simply undo it. Run the numbers before you apply, not after.

Reconfirming every three months

Tax-Free Childcare is not set and forget. Every three months you must log in to your childcare account and confirm that your details are still correct — that you are still working, still earning enough, and still expect to be under £100,000. HMRC sends a reminder before the deadline.

Miss it and the account becomes pay-only: the money already in there can still be spent on childcare, but no new top-ups are added until you reconfirm. In England, the funded hours normally continue to the end of a grace period, but that is a short reprieve rather than a safety net.

Two other things to watch. First, if you withdraw money from the account rather than spending it on childcare, the government takes back its 20% share of the withdrawal. Second, a bonus, a redundancy payment or a profitable freelance year can push someone over £100,000 mid-year — and because the test is about expected income for the whole tax year, you are supposed to declare it at the next reconfirmation, not wait until the tax return lands.

What to do next

Work out what the scheme is actually worth to your family before you set anything up. Our Tax-Free Childcare calculator takes your monthly childcare bill and number of children and shows the top-up you would receive and the amount you need to pay in each month. If either parent is close to the income limit, run the £100,000 check to see the cost of crossing the line and what would bring you back under it. You can apply and manage the account on GOV.UK.