If you’re self-employed, you may be able to claim tax-free childcare of up to £2,000 a year available if your profits from self-employment are over the age-relate thresholds. If your profits do not hit the required threshold, you may still be able to claim if you are in your first 12 months of self-employment and are still building up your income.
Here you’ll find out how tax-free childcare for the self-employed works, the income thresholds and how to apply.
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
How Does Tax-Free Childcare for the Self-Employed Work?
The government offers a contribution towards childcare for parents who are working, including if they are self-employed. If eligible, parents will receive £500 every 3 months, up to £2,000 a year, for each child to put towards the costs of childcare. You’ll receive the money in a separate account that you set up as part of the application process. The government will then pay £2 into this account for every £8 you put in and you can then use this money to pay for childcare.
Who is Eligible for Tax-Free Childcare?
You’ll need to meet the following criteria to be eligible to claim:
- Children must be under the age of 12 (or 17 years old for children with disabilities);
- Parents must earn above the income thresholds (see below) but below £100,000 per year;
- You must use an approved childcare provider;
- Adopted children are eligible but foster children are not;
- You must have a UK national insurance number;
- You must reconfirm your status every 3 months to remain in the scheme.
Income Thresholds for Tax-Free Childcare
If you’re self-employed, your eligibility will be based on your business profits (subject to the limit of £100,000 per year). You’ll need to earn at least the national minimum wage over the next 3 months:
- £1,976 if you’re aged 23 or over (£120 per week)
- £1,909 if you’re aged 21 or 22
- £1,420 if you’re aged 18 to 20
- £1,000 if you’re under 18 or an apprentice
If you’re self-employed, your income can vary month-to-month and you may have low earnings for the next 3 months. In this case, you can use an average of your income for a full tax year. That means as long as you expect your business profits before tax to exceed £7,904 for the tax year 2022-23, you’ll meet the income criteria.
What Counts as Income?
When it comes to calculating whether you have met the lower income threshold of £7,904, dividends need to be excluded. So if you have a limited company and pay yourself with salary and dividend, then only your payslip income will be taken into consideration for tax-free childcare.
In addition to dividends, interest, pension payments and income from investing in property do not count towards the minimum income threshold.
If you or your partner earn over £100,000 per year you are not eligible to claim tax-free childcare. When calculating whether you earn over £100,000 you’ll need to calculate your adjusted net income.
Adjusted Net Income
Adjusted net income means your income before using your personal allowance less any self-employed trading losses, gift aid and gross pension contributions.
For example, for the tax year 2022-23, you earn £25,000 through self-employment and use trading losses from 2021-22 of £5,000 against these profits. Your adjusted net income is £20,000 (£25,000 – £20,000).
Childcare Start-Up Period for Sole Traders
If you are new to self-employment, you may still be eligible to claim tax-free childcare even if you earn below the threshold. To support parents as they build up their income, the government has introduced a ‘start-up period’ of 12 months, which parents can access once every 5 years.
How to Check if You’re Eligible
The easiest way to check if you can claim tax-free childcare is to use the .GOV childcare calculator. This will tell you what other types of childcare support you may be able to claim such as 30 hours free childcare.
How to Apply for Tax-Free Childcare
To apply, you’ll need to start by setting up an online childcare account – you’ll need your UTR number if you’re self-employed. You’ll then need to pay your childcare contributions into this account and the government will make their top-up into it. You can then begin making payments to your approved childcare provider.
You can withdraw any money you put in if your circumstance changes and you need the money for reasons other than childcare. But the government will withdraw any corresponding contributions its made.
Tax-Free Childcare and Other Tax Credits
You cannot claim tax-free childcare and working tax credits, child tax credits or universal credits, so make sure you use the childcare calculator to work out what is better for you before applying.
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