Tax-Free Childcare: Paid work
The claimant and their partner must both be in qualifying paid work on the date of declaration (or reconfirmation).
- National insurance number requirement
- What is paid work?
- Employed claimants
- Self-employed claimants
- Employment and self-employment
- Expected income vs. hours
- What counts as employed income?
- What counts as self-employed income?
- Treated as in qualifying paid work
Both the claimant, and their partner if they have one, must hold a National Insurance Number. The only exception to this is if the claimant's partner is resident and in paid work in another EEA country.
Paid work means work done for payment or in expectation of payment and does not include being engaged by a charitable or voluntary organisation, or as a volunteer, in circumstances where the only payment made is in respect of expenses.
Employment for TFC means 'engaged under a contract of service or in an office (including an elected office) or so engaged as a UK resident working overseas'. Where someone has accepted an offer of work on or before their declaration date and expects that work to start within the next 31 days they will still qualify. Similarly, where a person is on unpaid leave from work when they make their declaration, they will still be treated as employed if they expect to return to work within 31 days of their declaration date.
If the person is employed they will be treated as in qualifying paid work if their expected income for the specified period (which starts from the date they make their declaration or reconfirmation) to be equal to or above the relevant threshold.
For most people aged 23 or over, the threshold will be £1853.28 per 3 month entitlement period (if it contains 13 weeks) from 1 April 2021.
The specified period is:
a) 3 months beginning with the date of the declaration of eligibility
b) Where the person has accepted an offer of work and expects to start within 31 days of the declaration date - 3 months beginning with the day on which the work is expected to start
c) Where the person is absent from work on unpaid leave and expects to return to work within 31 days of the declaration date - 3 months beginning with the day on which the person is expected to return to work.
The relevant threshold is:
The current NMW rates can be found on GOV.UK.
Daisha (age 30) and Peter (age 29) are married and have two children. Daisha makes her declaration of eligibility on 30 April 2021. Peter works full time (35 hours a week). Daisha works 30 hours a week but from 18 June, Daisha expects to reduce her hours to 10 a week. Peter's relevant threshold for the entitlement period is £8.91 x 16 hours = £142.56 x 13 weeks = £1853.28. His income is expected to exceed his threshold and so he is in qualifying paid work.
Daisha's relevant threshold is also £1853.28. Daisha calculates her expected income for the period as ((30 x £8.91 x 7 weeks) + (10 x £8.91 x 6 weeks)) = £2405.70. The fact that Daisha works only 10 hours a week in the last 6 weeks of the entitlement period is irrelevant. Of course, if she continues to only work 10 hours a week and expects to do so for the following entitlement period, she will not be in qualifying paid work when she reconfirms her eligibility.
Assume that Daisha from Example 1 actually worked 18 hours for 7 weeks and then 10 hours for 6 weeks - her expected income for the period would be £1657.26. This means Daisha would not meet the qualifying work requirement and therefore the couple will not be entitled to TFC top-up payments.
Self-employed for TFC purposes means 'engaged in carrying on a trade, profession or vocation on a commercial basis and with a view to profit, either on one's own account or as a member of a business partnership. This definition is different to both tax credits and universal credit.
Self-employed claimants who are in the first 12 months of their business (called the start-up period) can qualify without meeting any earnings threshold. This is similar to the start-up period in universal credit.
The 12 months starts from the commencement of the trade, profession or vocation. Only one start-up period is allowed every five years.
If the person is self-employed they will only be treated as in qualifying paid work if their expected income from paid work for the specified period (which starts from the date they make the declaration of reconfirmation) to be equal to or above the relevant threshold.
For self-employed people this means their threshold will be either £1853.28 (based on a 3 month/13 week period from 1 April 2021) or £7,413.12 (based on a 12 month period - see below).
The specified period is 3 months beginning with the date of the declaration of eligibility.
The relevant threshold is:
The current NMW rates can be found on GOV.UK.
Self-employed claimants have a second opportunity to meet the qualifying paid work requirement. This was introduced because using the normal test explained above, self-employed claimants who have fluctuating incomes, might not qualify when looking only at a three-month entitlement period but would do if you look at their annual income.
If they do not qualify under the normal test above - looking at their expected earnings over a three month period - then they can qualify if they expect their income for the tax year (12 months) in which the date of declaration falls to be greater than the relevant threshold.
Relevant threshold when using a 12 month (tax year) expected income (rather than 3 months) has a slightly different definition when setting what rate of NMW to use.
Mark is a self-employed single parent (age 27). He makes a declaration of eligibility on 30 April 2021. As this is in the 2021/22 tax year, the 23 and over NMW rate of £8.91 applies as Mark was aged 27 on 6 April 2021 (at the start of the tax year). His relevant threshold will be £8.91 x 16 hours = £142.56 x 52 weeks = £7413.12
Mark will be in qualifying paid work if he expects his income from self-employment to be £7413.12 or more in the 2021/22 year.
Denise is a self-employed single parent. She runs her own business as a wedding photographer - she is very busy during the summer months (averaging 8 - 10 weddings each month) with only 1 or 2 each month in the winter.
Denise applies for TFC on 30 April 2021. Under the standard test (explained above) Denise's relevant threshold for the entitlement period (3 months from 30 April 2021) is £8.91 x 16 hours = £142.56 x 13 weeks = £1853.28. However, due to a low volume of work over the winter, Denise only expects her income from self-employment to be £1200 for the entitlement period.
However, Denise can also be classed as in qualifying paid work if her self-employed income for 2021/22 will be more than £7413.12. As Denise had a busy summer, she expects her annual income to be £12,000. Therefore she meets the test and will be in qualifying paid work for that first entitlement period starting on 30 April 2021
Some people may be both employed and self-employed. Where that is the case, the first thing to establish is whether they can meet the tests set out above through either their employed income alone or their self-employed income alone.
If they cannot, then they can combine the earnings from both over the 3 months beginning with the date of declaration of eligibility (or, where appropriate, the 3 months beginning with the day on which the work is expected to start of the person is expected to return to work). It should be noted that the rules explained above that allow self-employed claimants to consider their income over 12 months in order to qualify does not apply when combining employment and self-employment.
TFC does not work using actual income figures and there is no end of year reconciliation exercise like there is in the tax credits system. Instead, TFC asks people to forecast their expected income for the next 3 months in most cases (12 for some self-employed people).
So what does expected mean? The Regulations simply say it is the income which the person has a reasonable expectation of receiving.
HMRC have published some information about reasonable expectations in their guidance. See page 20 and 21 of the guide for parents. However, the examples cover more straightforward situations.
Until the system is established, it's hard to say how HMRC will police this, whether it will be subject to compliance checks and whether there will be any challenge to the 'reasonable expectation'.
What is clear is that if the person's actual income for the period turns out to be less than their threshold, HMRC cannot reclaim the TFC top-up automatically - they could only do so if they could show that the person's estimate of their expected income was not reasonable.
Any earnings that a person receives from any employment under a contract of service of any office, including an elected office, counts towards the threshold.
It is gross income that counts for TFC purposes - before any deductions for tax, national insurance or pension contributions.
Earnings are given the same meaning as in Section 62 ITEPA 2003. This includes:
- Any salary, wages or fee
- Any gratuity or other profit or benefit of any kind obtained by the employee if it is money or money's worth
- Anything else that constitutes an emolument of the employment
The last two bullet points ensure that all money payments that are similar to earnings are included - that includes bonuses, commissions, tips, overtime pay. It also includes non-cash earnings such as benefits in kind, for example, a company car or medical insurance.
Self-employed income unfortunately doesn't follow the tax system. It is calculated as:
(Amount of receipts) - (amount of expenses)
Receipts are those the person expects to derive from their trade, profession or vocation and expenses are those they expect to incur wholly and exclusively for the purposes of that trade, profession or vocation.
It is gross income that counts - before deductions of tax, national insurance and pension contributions.
If they are in partnership, then it is their share of the receipts less their share of the expenses.
Receipts and expenses of a capital nature are to be disregarded. Capital expenditure for tax is normally expenditure on long term assets, such as equipment or buildings, and normally capital allowances would be claimed. The cost is then charged to depreciation expense over the useful life of the asset.
Some people can be treated as in qualifying paid work even if they are not working. This means they are treated as in paid work and as having income equal to the earnings threshold.
In order for this to apply, the person must have been in qualifying paid work (or treated as if they were) immediately before the period they are:
- Paid statutory sick pay
- Paid maternity allowance
- Paid statutory maternity pay
- On ordinary or additional maternity leave
- Paid statutory paternity pay
- Paid statutory adoption pay
- On ordinary or additional adoption leave
- On shared paternal leave
Where a claimant, or their partner, are claiming TFC in respect of a child whose birth or adoption cause the period of leave, they will only be treated as in qualifying paid work for the last 31 days before they return to work. However, they would be treated as in paid work for the whole period of leave in respect of any other children they are claiming TFC for.
Self-employed claimants are also treated as in qualifying paid work during any period for which any of the bullet points above would have applied but for the fact that the work they did immediately before the period of leave was self-employment rather than employed under a contract of service.
Residents of other EEA countries who are in paid work in the UK who receive payments similar to those in the bullet points above or who are on similar periods of leave under the law of their own country are also treated as in qualifying paid work.
Where one member of a couple is in qualifying paid work and the other is paid or entitled to:
- Incapacity benefit
- Severe disablement allowance
- Long term incapacity benefit
- Carer's allowance
- Contributory employment and support allowance
- National insurance credits on the grounds of incapacity for work or limited capacity for work
The non-working member of the couple will be treated as in paid work so that they qualify for TFC.
For this exception to apply, there must be one member of the couple who is in qualifying paid work by meeting the relevant earnings threshold.
Zoisha and David have three children. Zoisha works 35 hours a week. David does not work as he is a full-time carer for his disabled mother. Even though David is not working and does not earn above the relevant threshold, he is treated as in paid work and so the couple can claim TFC support.
Note that there is a requirement for at least one member of the couple to meet the earnings threshold at all times.
Assume that Zoisha and David claim TFC from 31 October 2021, they are entitled to support for the first three month entitlement period because Zoisha is in qualifying paid work as she meets the earning threshold and David is treated as in qualifying paid work because he is entitled to carer's allowance.
The couple will be expected to reconfirm their eligibility for TFC for the next three month entitlement period. Zoisha has given up work because her own mother is ill and she has also claimed carer's allowance. The couple will no longer qualify for TFC because neither of them is in qualifying paid work by virtue of meeting the earnings threshold.
Self-employed claimants are also treated as in qualifying paid work during any period for which any of the bullet points above would have applied, but for the fact that the work they did immediately before the period of leave was self-employment rather than employed under a contract of service.
Residents of other EEA countries who are in paid work in the UK who receive payments similar to those in the bullet points above under the law of their own country are also treated as in qualifying paid work.
Claimants who need to reconfirm eligibility will be asked to confirm that they expect their earnings to be above the threshold over the next three months.
The Government confirmed that until 31 October 2020, any working parent usually eligible for 30 hours free childcare or Tax-Free Childcare was to remain eligible if they fell below the minimum income requirement due to the coronavirus outbreak.
The Government have since confirmed that these protections continue from 1 November 2020 but only for working families who receive support through either the SEISS (if they are self-employed) or through the Coronavirus Job Retention Scheme (furlough scheme), via their employer. There is some information on GOV.UK.
Last reviewed/updated 12 July 2021