Tax-Free Childcare: Other childcare schemes
The general rule is that neither the claimant nor their partner will be an eligible person for TFC if they are receiving other childcare support or have made a claim for that childcare support that covers the relevant period.
The relevant period means any period which includes the date of the declaration, any part of the entitlement period for which the declaration is made or falls within that entitlement period. For opening a new childcare account, the period is 3 months from the date of declaration.
Other childcare support means any payments towards the costs of childcare which are made out of funds provided by a national authority which includes payments made by Ministers of the Crown, Scottish and Welsh Ministers or a Northern Ireland Department.
What schemes will fall under childcare support?
It is not entirely clear which schemes fall under this definition. In the explanatory notes to the Childcare Act 2014, the childcare grant administered by the Students Loans Company is specifically mentioned as covered by this section. According to the HMRC TFC manual, this section does not apply to tax credit awards.
Our understanding is that it does not include the childcare earnings disregard in housing benefit or payments made directly to their childcare provider such as free 15 hours or 30 hours childcare provision.
The interaction between TFC and tax credits is perhaps the most significant due to the consequences that potentially flow from a tax credit claimant making a claim for TFC.
Under Section 30 Childcare Payments Act 2014, where:
A person makes a valid declaration of eligibility for an entitlement period
An award of tax credit has been made to that person or their partner on the relevant day and the award is for a period that includes the relevant day
In most case, the tax credit award terminates immediately before the relevant day, regardless of whether the decision on the claim was made before or after the relevant day. There are some slight variations where there is a review under Section 21A Tax Credits Act 2002 or there is an appeal against a tax credit award.
Relevant day in this context means the first day of the entitlement period or if later, the day on which the declaration of eligibility for the entitlement period was made.
This is an automatic process – once the TFC claim is made and the conditions above satisfied, the tax credit award will be determined. This is the case even if no childcare support is claimed in tax credits and the whole of the tax credit claim will stop (both working tax credit and child tax credit).
This means that tax credit claimants must check carefully whether they will be better off claiming TFC rather than the childcare element of tax credits. HMRC state that once the tax credit claim is terminated, it is not possible to claim tax credits again and instead the person will need to claim universal credit or pension credit. See our tax credit section for more information.
The broad rule is that you cannot get both UC and TFC at the same time. Under the TFC rules, on the date of their declaration, they must not be receiving UC and there must not be a claim for UC that may result in UC becoming payable to the person covering that declaration period or any period in the 3 months following the date of declaration.
If someone claiming UC wants to make a claim for TFC, the HMRC manual advises:
A person should not cancel their UC account before they are sure they are eligible for TFC. If a person is currently claiming UC and wants to apply for TFC instead, they should make an application for TFC (despite not being eligible due to their current UC claim) before cancelling their UC account. This action will confirm if there are any reasons (other than UC) why they might not be eligible for TFC. If their UC account is the only reason they are ineligible for TFC, and there have been no recent changes to their circumstances which may affect their eligibility, they can then decide to cancel their UC account and reapply for TFC.
Although making an application for TFC while knowing you are ineligible due to UC ostensibly makes such parents liable to a penalty under section 42 of CPA 14 HMRC will always use their discretion to take no action under that provision.
However, it is also possible to switch the other way, ie from TFC to claim universal credit instead. There is nothing in the TFC rules that prevents that and HMRC have confirmed that the policy is deliberately designed to allow this to happen. If a person has made their 3 month declaration of eligibility for TFC and then decides to claim UC within that TFC entitlement period, they can do so. They can continue to operate their TFC account as normal during the remainder of the entitlement period as well as receive UC. Whilst this may seem generous, our understanding is that HMRC are content to allow this small degree of dual entitlement for a short period. However, there are provisions within the Childcare Payments Act (most notably, s33 and s 34) which are designed to deter deliberate manipulation of this dual provision concession.
Last reviewed/updated 3 July 2024