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
- fixed weekly costs
- variable weekly costs
- fixed monthly costs
- variable monthly costs
- time limited costs
Childcare calculator
Change of circumstances
Calculating weekly relevant childcare costs
Childcare run-on
Childcare compliance checks
More information
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 and pays for. Childcare paid by an employer and free childcare cannot be included. In particular the value of any childcare vouchers received by the employer under an Employer-supported childcare scheme 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.
Add up what was paid for the last 4 weeks and divide the result by 4.
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.
Multiply the monthly amount by 12 and divide the result by 52.
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.
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:
- the start and end date of childcare
- the actual costs for the short period
- the childcare provider’s details
This is not mandatory and claimants are free to choose which method to use.
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.
Knowing whether there has been a change of circumstances relating to childcare is not easy.
For childcare, there is a relevant change of circumstances:
- If the ‘weekly relevant childcare costs’ (as defined below) exceed the average weekly childcare costs by £10 per week or more;
- If the ‘weekly relevant childcare costs’ are less than the average weekly childcare costs by £10 per week or more;
- 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.
Note: The one month time limit has was temporarily extended from 23 May 2020 until 30 September 2021 for certain critical workers due to the coronavirus pandemic.
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. 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.
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.
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:
- the first day of the week in which the change occurred; and
- the first day of the week which contains the day one month (3 months prior to 6 April 2012) prior to the date notification of the change is given.
Decrease in childcare costs
If the childcare costs are just 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 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:
- Calculating the correct figure for childcare costs is extremely difficult. Following the rules outlined above, claimants who have variable costs will most likely have their costs based on their estimated costs over the next 52 weeks.
- Compliance staff tend to ask childcare providers to confirm the claimants costs over a specific period, for example a tax year or a three month period and compare that to the amount the claimant has claimed.
- The legislation does not have any provision that goes back and compares actual costs with estimated costs. Therefore it is possible that the actual costs vary from the estimated costs calculated in accordance with the legislation.
- Advisers should ensure they speak to the claimant about their estimate and how it was calculated to ensure the rules above (and set out for claimants in WTC 5 were followed). If they were, then an appeal should be filed where a compliance officer attempts to use actual costs (where they vary from the estimated costs calculated in accordance with the legislation).
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.
Last reviewed/updated 1 July 2022