Any parent who has ever used the UK government’s tax-free childcare system knows what a painful experience it is. Each month when I log into my account, I feel a sense of dread and frustration. Why is something that is such a lifeline for so many parents so difficult to use?
The scheme gives working parents an extra £2 for every £8 they spend on childcare. You can claim up to £2,000 a year for each child (or up to £4,000 a year for a disabled child).
To take part, you need to set up a childcare account, which you and the government pay into. You can then use this money to pay your childcare provider.
Families can claim for a child until 1 September after their 11th birthday (or the September after their 16th birthday if they are disabled).
It is most commonly used to help with nursery costs – but it can be used for wraparound childcare or holiday clubs once your children are at school. You may also be able to use it to pay for a registered childminder or nanny.
However, with only about 580,000 families using it out of the roughly 800,000 who are eligible, we look at some of the problems that could be putting people off.
Spread-out payments
Instead of parents receiving £2,000 a year for each child, they actually get £500 every three months and can’t roll over the allowance each quarter.
This means that if, say, you are self-employed and your business only operates at certain times of the year or your income is uneven, you may miss out on the support when you are not using childcare.
At other times you may need to pay more money into your tax-free childcare account than you can claim on.
Operating the scheme quarterly means extra admin for parents.
“To keep getting tax-free childcare, you must sign in to your childcare account every three months to confirm your details are up to date,” the government says.
If you forget to do it on the portal, then you lose the support until you reapply.
The government website offers no support with calculating how much to pay in. To find help, you can use taxfreechildcarecalculator.com.
However, there is no standard way that childcare providers bill parents. While some charge a monthly fee that is based on your annual cost, some do it monthly based on what you will use or have used. Where this is the case, how much you need will vary from month to month.
‘Clunky system’
The system is clunky to use. Parents must log into a portal where each child has a separate account. The fastest way to add cash to your account is by bank transfer (you can also pay money in by direct debit or standing order), but this still takes 24 hours to appear and for the government to add its top-up.
Then parents need to set up a recurring payment to a provider each month – difficult if your costs vary – or log in again two days later each month to make the payment as needed.
Rising childcare costs
The amount of help on offer has been the same since 2017, which is when the scheme started despite childcare costs increasing year on year.
In England, the average cost of 50 hours of nursery care a week for a child under two is £148, according to the children’s charity Coram, despite the fact many parents there can now get 30 hours of free childcare a week. In 2017, prior to the scheme’s expansion, the figure was £225.
To get the maximum sum of £2,000 a year, parents have to spend at least £10,000 a year on childcare.
High earners
If either you or your partner has an adjusted net income of more than £100,000 a year, then you are not eligible for the scheme.
Parents earning just over £100,000 can be hit with a “double whammy” where they face an effective 60% tax rate while also losing access to tax-free childcare and 30 hours of free nursery provision.
With support worth up to £10,000 a child each year, experts warn that, in some cases, a pay rise of £10,000 can leave families worse off – and some may need to earn closer to £125,000 or more before they see any real financial benefit.
Other benefits
For people at the other end of the income spectrum, it is not always easy to work out how the scheme fits with other financial help that is available.
Parents who are on universal credit can get 85% of childcare costs covered but they cannot use tax-free childcare.
If they do use the scheme, it could affect their benefits, which creates a barrier for working parents to take on extra hours and income.
What the experts say
Anna Stevenson, a senior benefits specialist at the charity Turn2us, says too many families struggle to understand what they are entitled to, how different schemes interact and which option is best for them.
“For parents on universal credit, the issue is particularly high-stakes,” she says. They cannot receive tax-free childcare and universal credit childcare support at the same time, and many may be better off using the universal credit childcare element, which can cover up to 85% of eligible childcare costs. But understanding that choice is not always straightforward.”
An HM Revenue and Customs spokesperson told us: “Research shows that almost 90% of customers have a good experience of the childcare service and, as part of our overall efforts to further improve our customer service, we’re undertaking work over the coming years to modernise the service.”
