Tax-Free Childcare: What are qualifying childcare costs?
Tax-free childcare can be used to pay for childcare provided by a childcare provider who is registered or approved. There is some information on the GOV.UK website which explains what counts as registered/approved childcare, and covers the various rules across England and the devolved administrations.
Tax-free childcare cannot be used to pay for childcare provided by the claimant, their partner, the child's other parent or foster carer or step-parent or anyone else with parental responsibility for the child (where relevant).
If the childcare is provided by a different relative (grandparent; aunt or uncle; brother or sister), tax-free childcare can be used to pay those costs provided the relative is registered/approved childcare provider and the childcare takes place on the childcare provider's premises. Note that the 30-hours free childcare offer cannot be used for childcare provided by a relative.
Tax-free childcare payments are for actual childcare but there are various situations where the childcare fees also include other items.
The childcare costs can include items such as deposits, retainers (e.g. during holiday periods etc.) and payments in advance.
Tax-free childcare payments can only be used to pay for extras such as meals or trips if they form part of the childcare costs arrangements. Where the childcare is provided by a private school where the child attends, tax-free childcare can be used to pay for those costs if they:
- Relate to a child under compulsory school age, or
- Do not include any element of compulsory education, or
- Are for childcare provided out of school hours.
If the costs are partly for qualifying childcare and partly for compulsory education, only the portion which relates to the qualifying childcare can be paid for using the tax-free childcare account.
For the childcare costs to count as qualifying childcare costs, one of the main reasons for the childcare must relate to childcare that is needed to enable the claimant (and their partner) to work. This includes:
- Time spent working
- Time spent sleeping (during the day) after a night shift
- Travelling to and from work.
There are some examples of this ‘main reason’ test in the guidance on the childcare choices website.
Tax-Free Childcare (TFC) accounts can be used to pay for qualifying childcare which is defined as ‘any form of care or supervised activity for a child that is not provided in the course of the child’s compulsory education’. Our understanding is that HMRC accept online tuition can, depending on the circumstances, be a supervised activity for TFC purposes and therefore it may be possible to use that scheme to pay for online tuition.
However, as mentioned earlier, the TFC rules state that payments can only be made for childcare where one of the main reasons is to enable the claimant to work. If the claimant needs to be present and supervising the child themselves during the online tuition, that may mean they are not working during those periods and HMRC may argue that enabling the claimant to work is not a main reason for the childcare. However, it will depend on the overall circumstances of each individual case as to whether the work test is met.
In cases where the childcare is provided by a registered/approved nanny who is employed by the TFC claimant, qualifying childcare costs covered by TFC can also include the costs of employing the nanny.
Because the TFC claimant will be the nanny's employer, they will usually need to operate a Pay As You Earn (PAYE) scheme for them and will deduct income tax and national insurance (NI) contributions from the nanny's gross pay and pay those contributions over to HMRC on the nanny's behalf.
The TFC claimant can actually pay the income tax and NI contributions directly to HMRC from their childcare account. There is a specific 'button' in the on-line childcare account, 'what to do if you employ a nanny', with instructions on what to do and how to pay the tax and NI contributions over to HMRC. The payment will normally take 3-5 working days to reach the claimant's PAYE account.
Last reviewed/updated 1 July 2022