Tax-Free Childcare (TFC) is a government scheme that tops up your childcare payments by 20% — effectively giving you £2 for every £8 you pay in. For a family with two children in full-time childcare, that's up to £4,000 per year from the government.
Yet millions of eligible families aren't claiming it. If your income is close to the £100,000 eligibility limit, see our £100k tax trap guide for how salary sacrifice can help. For the Child Benefit picture, see our Child Benefit tax charge guide.
Check your take-home with childcare costs
Use the free calculator to model salary sacrifice and its effect on your Adjusted Net Income.
How Tax-Free Childcare works
You open a government-backed childcare account via the Childcare Service. For every £8 you pay in, the government adds £2 — up to a maximum government top-up of:
- £500 per quarter (£2,000/year) per child
- £1,000 per quarter (£4,000/year) per disabled child
The money can be used with any HMRC-registered childcare provider: nurseries, childminders, after-school clubs, holiday camps.
Who qualifies?
You (and your partner, if you have one) must:
- Be working — employed or self-employed
- Each earn at least £2,379 per quarter (the equivalent of 16 hours at National Living Wage)
- Each earn no more than £100,000 Adjusted Net Income per year
If either parent earns over £100,000 Adjusted Net Income, the whole household loses eligibility — not just the higher earner. This is a hard cliff edge, not a taper.
The £100,000 trap — and how salary sacrifice fixes it
If your income is close to £100,000, salary sacrifice pension contributions can bring your Adjusted Net Income (ANI) below the threshold — restoring eligibility.
| Gross salary | £105,000 |
| Pension sacrifice (£5,000/year) | −£5,000 |
| Adjusted Net Income | £100,000 |
| Tax-Free Childcare eligible? | ✓ Yes |
| Annual TFC top-up (2 children) | £4,000 |
| Personal Allowance restored | £12,570 |
In this example, a £5,000 pension sacrifice saves:
- £3,000 in income tax (60% effective rate in the taper zone)
- £100 in NI
- £4,000 in Tax-Free Childcare top-ups
- £5,040 in restored Personal Allowance tax savings
Total benefit: over £12,000 from a £5,000 sacrifice.
Tax-Free Childcare vs Childcare Vouchers
Childcare Vouchers were closed to new entrants in October 2018. If you joined before then, you may still be using them. Here's how they compare:
| Tax-Free Childcare | Childcare Vouchers (legacy) | |
|---|---|---|
| Government top-up | 20% (£2 per £8) | Via salary sacrifice (tax/NI saving) |
| Max benefit | £2,000/child/year | £933/year (basic rate) |
| Multiple children | ✓ (per child) | ✗ (per parent) |
| Self-employed | ✓ | ✗ |
| Income limit | £100,000 ANI | No upper limit |
For most families with more than one child, Tax-Free Childcare is more valuable.
Can I use Tax-Free Childcare with 15/30 free hours?
Yes. Tax-Free Childcare can be used alongside:
- 15 hours free childcare (all 3–4 year olds)
- 30 hours free childcare (working parents of 3–4 year olds)
- 15 hours for 2 year olds (from April 2024 for eligible families)
You cannot use it at the same time as Childcare Vouchers or Universal Credit childcare support.
How to apply
- Go to gov.uk/tax-free-childcare
- Create a childcare account via the Childcare Service
- Add money to your account — the government top-up is added automatically
- Pay your childcare provider directly from the account
Reconfirm eligibility every 3 months to keep the account active.
What this means for you
If you earn £60,000 and have two children in childcare, you are eligible for up to £4,000/year in Tax-Free Childcare top-ups. That is £333/month from the government, simply for using the childcare account.
At £105,000, a £5,000 pension sacrifice brings your ANI to £100,000, restoring TFC eligibility worth £4,000/year for two children — on top of the £3,000 income tax saving and £100 NI saving from the sacrifice itself.
If you are close to the £100,000 threshold, the combined value of TFC eligibility plus Personal Allowance restoration makes salary sacrifice one of the highest-return financial decisions available.
Try the TaxCal UK calculator to estimate your take-home pay.
Summary
- Tax-Free Childcare gives 20% top-up on childcare costs — up to £2,000/child/year
- Both parents must earn between ~£9,500 and £100,000 ANI
- Salary sacrifice can bring ANI below £100,000 to restore eligibility
- Can be combined with free childcare hours
- Cannot be used alongside Childcare Vouchers or Universal Credit childcare
FAQ
Can I use Tax-Free Childcare and the 30 free hours at the same time?
Yes. Tax-Free Childcare can be used alongside the 15 and 30 free hours entitlements. You cannot use it alongside Childcare Vouchers or Universal Credit childcare support.
What happens if I go over £100,000 ANI mid-year?
You lose eligibility for that quarter. You must reconfirm eligibility every three months — if your ANI is above £100,000 at any reconfirmation, your account is suspended.
Does salary sacrifice help me stay eligible for Tax-Free Childcare?
Yes. Salary sacrifice reduces your ANI. If your income is close to £100,000, sacrificing enough to stay below it preserves eligibility worth up to £4,000/year for two children.
Can self-employed parents use Tax-Free Childcare?
Yes, provided both parents meet the minimum earnings requirement (equivalent to 16 hours at National Living Wage per quarter) and neither earns over £100,000 ANI.
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