Tax-Free Childcare: Employer supported childcare
In order to be an eligible person for TFC, neither you nor your partner can be in a relevant childcare scheme. Existing recipients of childcare vouchers or directly contracted childcare will need to decide whether to stay with their existing support or claim TFC instead.
'Relevant childcare schemes' essentially means Employer Supported Childcare schemes - childcare vouchers (under Section 270A of ITEPA 2003) and directly contracted childcare (under conditions A to D Section 318A ITEPA 2003). Workplace nurseries are not affected by TFC and so a claimant can benefit from a workplace nursery and claim TFC support as well.
The general rule is that to be an eligible person for TFC neither the claimant nor the partner can be receiving childcare vouchers or directly-contracted childcare from their employer. The legislation is very specific about what counts as receiving that support. In order to meet this eligibility condition neither the claimant nor their partner must be an eligible employee in relation to a relevant childcare scheme. Eligible employees are defined under Section 270AA (childcare vouchers) and Section 318AZA (directly contracted childcare) ITEPA 2003.
However, in relation to opening a TFC account, if the claimant or their partner intends to give their employer a 'childcare account notice' before the end of the TFC entitlement period (3 months form the date of declaration) then they will be an eligible person for TFC and can continue with the claim.
A 'childcare account notice' can also be used in a situation where a claimant forms a new relationship with a partner who receives childcare vouchers or directly contracted childcare from their employer. In that case, as long as the new partner plans to give a notice to their employer before the end of the TFC entitlement period for which the declaration is made they will be an eligible person for TFC and can continue with the claim.
A partner is treated as a 'new partner' if at the date of declaration they have not been the claimant's partner when any earlier declaration of eligibility was made.
What is a childcare account notice?
A childcare account notice is a written notice informing the employer that the employee wishes to leave the scheme in order to open a childcare account or enable the employee's partner to do so. There is no prescribed form for this and a written letter from the claimant or their partner to the employee should suffice. We recommend a copy is kept for their own records and a copy of any response from the employer.
Failure to give a childcare account notice
Where TFC is claimed on the basis that the claimant or their partner plan to serve a childcare account notice, but then they fail to do so, HMRC have the power to recover the top-up payments.
The person who made the declaration is liable to pay HMRC an amount equal to the sum of any top-up payments made to the person for their entitlement period.
Where a person is a resident of another EEA country who is doing paid work in the UK, or their partner, is part of a similar employer childcare scheme the rules in this section would apply.
TFC was introduced to replace childcare vouchers and directly contracted childcare support from employers.
The tax and NIC relief associated with childcare vouchers and directly-contracted childcare was withdrawn for new joiners from 4 October 2018. Certain people who signed up before that date are eligible to continue receiving the relief. You can find out who can still claim vouchers and directly-contracted childcare on the LITRG website.
Parents cannot benefit under both schemes at the same time. Anyone currently claiming childcare vouchers/directly-contracted childcare and who has given their employer a ‘Childcare Account Notice’ (explaining their intention to claim TFC instead and leave the voucher scheme) can no longer claim the tax and NIC relief associated with childcare vouchers and directly-contracted childcare.
Even if they subsequently leave the TFC scheme and meet the conditions for continuing to benefit from the tax and NIC relief on childcare vouchers or directly-contracted childcare, they cannot re-join their voucher scheme.
Some people will be better off claiming TFC than vouchers/directly-contracted childcare. However, some people will be better off staying with their existing employer support. Careful better-off calculations need to be carried out that consider not only currently circumstances but also known future changes.
Advisers will also need to bear in mind that there are some fundamental differences between the schemes – for example TFC is an amount per child per year, whereas the tax and NI saving for childcare vouchers is only available on up to £55 a week of vouchers and the definition of what counts of a child is different between the schemes.
HMRC have a childcare calculator that includes vouchers and TFC – however due to the complexities involved, advisers should double-check any results.
Last reviewed/updated 26 May 2022