Tax Credits: Understanding childcare

One of the most important parts of the current tax credits system is the help it provides with childcare costs. This is done through the childcare element of Working Tax Credit which can provide help with up to 70% of eligible childcare costs up to a maximum of £175 for one child and £300 for two or more children. This means that the maximum support that a claimant can receive is £122.50 for one child and £210 for two children.

As well as being one of the most helpful parts of the system to claimants, it is unfortunately one of the most complicated. HMRC focus a great deal of their compliance activity on the childcare element as they believe a large number of errors are made in this area.

This section of the site explains more about childcare including who can claim it and how to calculate average weekly childcare costs.

Coronavirus pandemic & childcare

We explain the conditions to claim the childcare element in the main section of our website

To qualify for the childcare element, working tax credit claimants have to meet certain hours requirements as well as other conditions. Hours that claimants were treated as working under the special coronavirus rules in place until 30 September 2021 (outlined on our tax credits and coronavirus page) count when considering whether they qualify for childcare support.

During the early stages of the pandemic, some childcare providers shut down but asked parents to continue paying their fees or to pay retainer fees. Under a strict reading of the legislation, childcare costs cannot be claimed if the child is not attending or taking up their place. However, HMRC confirmed that they would continue to pay the childcare element in cases where childcare costs were incurred but the claimant was unable to send their child to the provider due to coronavirus. This concession was withdrawn from 8 September 2020 and childcare costs paid for childcare that does not take place have not been accepted for tax credits from that date.

In January 2021, HMRC issued a bulletin confirming that childcare costs cannot be claimed where the child stops attending the childcare provision for four weeks or more even if costs are still being incurred. The four-week period is calculated from the last day the child attended the childcare provision. This rule applies irrespective of whether the absence from the childcare setting is related to the coronavirus pandemic. It applies in any scenario where the child would normally expect to attend the childcare provision but does not do so for four weeks or more. It does not apply in cases where the childcare is variable and there are periods when the child is not scheduled to attend, for example where the childcare takes place on a term-time basis or only during the school holidays etc.

HMRC’s rationale for this position is that in order for the childcare element to be payable, three conditions must be satisfied: that childcare costs are being (1) incurred and (2) paid for childcare (3) provided. Therefore, where childcare costs are being incurred and paid but no childcare is provided, the conditions are not met and in effect, the relevant childcare costs reduce to nil. Where they reduce to nil for four weeks or more, there is a relevant change to the childcare costs to nil and hence, the childcare element stops being payable.

If childcare is not being provided, but parents and carers are being asked to keep paying their provider in full or in part, these costs cannot be covered by tax credits. Where childcare stops being provided, HMRC will continue to pay the childcare element of Working Tax Credit for four weeks.

Last reviewed/updated 25 April 2022