Tax Credits: Calculating costs

This section explains how childcare costs are calculated for tax credit purposes. More information about who can claim help with childcare costs can be found here. You can navigate this section using the quick links below:

Amount of childcare support
Calculating average weekly childcare costs

Childcare calculator
Change of circumstances
Calculating weekly relevant childcare costs
Childcare run-on
Childcare compliance checks
More information
 

Amount of childcare support

The childcare element provides support of 70% of eligible childcare costs. Eligible childcare costs are the amount spent on approved childcare, up to a maximum of £175 a week for one child, and £300 for two or more children. Therefore, the maximum support with one child in childcare is £175 x 70% = £122.50 a week, and £300 x 70% = £210 a week for two or more children. It is important to note that these thresholds are applied once average weekly childcare costs have been calculated (and aggregated if there is more than one child).

The 70% rate applies from 6 April 2011. For the tax years 2010/2011, 2009/2010, 2008/2009, 2007/2008 and 2006/2007 the rate was 80%. For 2005/2006 and earlier years the rate was 70%.

To be entitled to help with childcare costs, the claimant must incur relevant childcare charges. What constitutes such charges is explained in more detail in our who can claim section.

Relevant childcare costs are calculated by aggregating the average weekly childcare costs for each child for whom charges are incurred and rounding them up to the nearest whole pound.

It is important only to include costs that the claimant actually incurs. Childcare paid by an employer and free childcare given to younger children cannot be included. In particular childcare vouchers must be deducted before you calculate the average weekly costs.

Calculating average weekly childcare costs

The Working Tax Credit (Entitlement and Maximum Rate) Regulations 2002 set out how to establish average weekly childcare costs. The method depends on the frequency with which childcare costs are paid. We describe each method below. The HMRC WTC 5 leaflet includes numerous examples of the different methods of calculation.

The average weekly costs must be calculated using the methods below separately for each child before aggregating them together.

Fixed weekly costs

Add up what was paid for the last 4 weeks and divide the result by 4.

Variable weekly costs

Often this applies where the claimant pays more in the summer holidays than during term time. Add up the total paid for the last 52 weeks and divide the result by 52.

If no childcare has been paid for the last 52 weeks then the legislation states that any method which HMRC think is reasonable can be used. This can be done by totalling the estimated costs for the next 52 weeks and dividing the total by 52 to give an average.

Where a claimant has entered into an agreement for childcare, WTC 5 recommends that the claimant ask their provider for a written estimate and use that to work out the average.

Fixed monthly costs

Multiply the monthly amount by 12 and divide the result by 52.

Variable monthly costs

Take the charges for the previous 12 months, add them together and divide by 52.

If no childcare has been paid for the last 12 months then the legislation states that any method which HMRC think is reasonable can be used. This can be done by totalling estimated costs for the next 12 months and then dividing the total by 52 to give an average.

Where a claimant has entered into an agreement for childcare, WTC 5 recommends that the claimant ask their provider for a written estimate and use that to work out the average.

Time limited costs

From 15 April 2010, claimants who pay for childcare costs to cover short, fixed periods can choose to average over that particular period rather than a year.

Prior to that date, if a claimant incurred childcare costs for £100 per week for 6 weeks in the summer holidays, their average weekly costs were calculated by taking £600 and dividing by 52 which is £11.54 per week. Under the new rules, claimants can choose to use this old method or the new method which allows them to average over the short period, so in this example they would claim £100 for just 6 weeks rather than £11.54 for every week of the year.

This was introduced to make it easier for claimants to budget and meet their extra costs in the holidays.

To use this method the claimant must tell HMRC:

This is not mandatory and claimants are free to choose which method to use.

Childcare calculator

HMRC have published a calculator to help claimants calculate their childcare costs for new claims and changes of circumstances.

The calculator is on GOV.UK: https://www.gov.uk/childcare-costs-for-tax-credits

We recommend that claimants print a copy of the results page and keep it safe in case their claim is checked at a later date by HMRC.

Change of circumstances

Knowing whether there has been a change of circumstances relating to childcare is not easy.

For childcare, there is a relevant change of circumstances:

  1. If the ‘weekly relevant childcare costs’ (as defined below) exceed the average weekly childcare costs by £10 per week or more;
  2. If the ‘weekly relevant childcare costs’ are less than the average weekly childcare costs by £10 per week or more; 
  3. If the ‘weekly relevant childcare’ charges are nil.

In essence this means that no changes are made to a claim unless childcare costs go either up or down by at least £10 per week, or fall to nil. Increases in average costs by £10 a week or more (number 1 above) will often increase the award and should therefore be reported to HMRC within one month (3 months prior to April 2012) as the effect of the change cannot be backdated any further.

The time limit for reporting the changes described in numbers 2 and 3 above is one month. The one month reporting time limit runs from the date the change happens, or if later the date the claimant became aware of the change.

Calculating weekly relevant childcare costs

To determine if there has been a change, another calculation must be undertaken to calculate the weekly relevant childcare costs. These costs are then compared to the average weekly childcare costs that were used to calculate childcare initially and only if the difference between the two is £10 or more, or childcare costs are nil, is there a relevant change.

The expression ‘weekly relevant childcare charge’ carries a different meaning depending on whether the weekly childcare costs are fixed or variable.

Where they are fixed, the weekly relevant childcare charge is the aggregate of the weekly childcare charge for each child in respect of whom charges are incurred in each of the four consecutive weeks in which the change (ie the increase or decrease) occurred.

Where childcare costs are variable, the relevant childcare charge is the aggregate of the anticipated weekly charge for each child in respect of whom charges will be incurred for the next 52 weeks, divided by 52.

Where charges are paid monthly and are fixed, that fixed amount should be multiplied by 12 and then divided by 52 to ascertain the weekly relevant childcare charge. Where monthly charges are variable, aggregate the anticipated charges over the next 12 months and divide by 52.

Childcare run-on

Once it has been determined that a relevant change of circumstances has taken place with respect to childcare, the legislation then sets out when this change will be actioned.

Increase in childcare costs

The change is actioned from the later of:

Decrease in childcare costs

If the childcare costs are for a time limited fixed period, the length of which is known when the award is made, the change is made from the first day of the week following the end of that fixed period.

In all other cases, the first day of the week following four consecutive weeks in which the change occurred. This means that claimants in effect receive a four week run-on of childcare costs.

Childcare compliance checks

Childcare is an area that HMRC have identified high risk in terms of error and fraud. This means they are carrying out checks on claims involving childcare. As well as the normal compliance interventions checking childcare and exercises at renewal time that check high value awards, HMRC announced further compliance checks for childcare claims in the Autumn Statement 2012.

Advisers should be aware of the following points during investigations into childcare costs:

More information

HMRC have produced leaflet WTC 5 which contains examples of calculating childcare as well as a full list of qualifying childcare.

The HMRC technical manual has detailed information about the legislation.

Updated 9 June 2016