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.
Free Calculator
Check if salary sacrifice restores your TFC eligibility
The free calculator shows your Adjusted Net Income and the impact of pension sacrifice.
Calculate My Tax SavingsRecommended Tools
Consolidate your old pensions into one simple online plan.
Stocks & Shares ISA with low fees and smart diversification.
Free, impartial pension guidance from the UK government.
* Some links may be affiliate links. We may earn a commission at no cost to you.