What is the tax-free childcare scheme and who is eligible?

The tax-free childcare scheme

Tax-free childcare is a government funded scheme. Eligible parents can receive up to £2,000 per year, per child, towards childcare costs. Eligible parents can set up a tax-free childcare account online. For every £8 paid in, the Government will top up with an additional £2. You can use these funds to pay your childcare provider. However, some directors taking a basic salary could find themselves ineligible this year without taking action. Find out what action you may need to take if you are a director to avoid being ineligible.

Eligibility for the tax-free childcare scheme

Eligibility criteria

In order to be eligible there are a number of criteria to be satisfied including:

• you and your partner (if you have one) must be working whether that is as an employee or self employed;
• you and your partner (where relevant) must both meet a minimum income requirement which is based on the equivalent of 16 hours per week at minimum wage; and
• your child(ren) must be 11 or under and usually live with you.

With an increase in the minimum wage from 6 April 2024 to £12.21 for those aged 21 and over, the new minimum income requirement is £2,539 per quarter or £10,518 per annum.

The issue for directors

Directors of an owner managed business are typically remunerated with a low salary and high interest/dividend payments. As a result they may now find themselves ineligible for tax-free childcare if, for example:

• they are taking a salary of £5,000, set at the secondary NIC threshold so that there is no employee’s or employer’s NIC liability; or
• at £6,500 where some employer’s NIC may be payable but to ensure that the director also receives an NIC ‘stamp’.

Other forms of income including dividends, interest, property income and pension payments do not count towards the minimum income requirement. As such it would be necessary to increase your basic salary if wishing to still take advantage of the Government’s tax-free childcare scheme. In some cases, it may be more beneficial to take a higher salary of up to the personal allowance threshold (currently £12,570). But this depends on the specific circumstances of you and your business. Please contact the team if you have any questions or would like further advice on remuneration planning.