How does tax credit childcare support interact with other schemes?
Help with childcare costs is a complicated area because the Government offers different schemes. Each scheme has different qualifying rules and often the amount you receive can be different. Sometimes if you claim help from one scheme, that can stop you claiming help from other schemes and so you will need to try and work out which one is better for you based on your circumstances.
This section explains how the childcare element of working tax credit interacts with other childcare schemes.
Tax credits and childcare vouchers
Childcare vouchers are part of Employer Supported Childcare (ESC). Your employer may offer you childcare vouchers in addition to your salary or in exchange for you giving up part of your salary (called a salary sacrifice). By taking childcare vouchers you will save on some tax and National Insurance. The tax and NIC relief associated with childcare vouchers and directly-contracted childcare was withdrawn from 4 October 2018 although certain people who signed up before that date are eligible to continue receiving relief.
There is nothing to stop you receiving tax credits and childcare vouchers at the same time. However, you can only claim help through tax credits for costs you actually incur. This means you must deduct the value of any vouchers from your average weekly childcare costs for tax credit purposes.
For example, if your childcare costs are £150 a week for one child and you get vouchers of £55 a week from your employer, you can only include £95 a week as your costs for the childcare element of tax credits.
However, if you have sacrificed some of your salary to get childcare vouchers the income figure you declare for tax credits will be lower than it was before the sacrifice (subject to the £2,500 disregard for falls in income).
In some cases the amount of tax and National Insurance you save from taking the vouchers may not make up for the amount of tax credits you lose.
Most people who qualify for tax credits are likely to be better off claiming help through the childcare element of tax credits and not taking childcare vouchers offered through a salary sacrifice. This is because initially you will lose significantly more tax credits than you will gain in tax and National Insurance savings from taking the vouchers and over the longer term you will gain only a small amount from the vouchers. This example shows how the interaction between the two schemes works:
However there are some exceptions to this rule. For example, if your childcare costs are a lot higher than £175 a week for one child or £300 a week for two or more children then you can claim vouchers as well as the maximum amounts of tax credits. Similarly, if your employer offers you vouchers in addition to your salary (rather than as a salary sacrifice) you will be better off taking them.
This means it is important that you check your own position carefully and work out which is better. You should contact a welfare rights adviser at a local advice agency for further support.
Tax credits and universal credit
Both working tax credit and child tax credit are gradually being replaced by universal credit (UC). You cannot claim both together. UC is now available across the UK and HMRC state that most people can no longer make a brand new claim for tax credits. Eventually, everyone who is currently claiming tax credits will be moved across to UC. In some cases, a change in your circumstances (for example if you change from a joint to a single household or need to claim another benefit that UC is replacing) may mean your current tax credit claim ends and you claim UC instead of tax credits. You can find out more about the introduction of universal credit in tax credits and benefits. You can find out more about childcare support in UC on our universal credit and childcare pages.
Tax credits and free childcare
You cannot claim the childcare element of working tax credit to cover any free childcare. When your child starts getting free childcare, you must tell HMRC about the change in the childcare costs you pay.
Tax credits and other childcare support
You may qualify for other forms of childcare support such as the childcare grant if you study. Often the rules of these schemes say you cannot claim help if you are already claiming help through the childcare element of working tax credit. It is important that you check the rules carefully if you are considering claiming other childcare support at the same time as the childcare element of tax credits.
Tax credits and tax-free childcare
Tax-free childcare (TFC) was introduced in April 2017 and the gradual roll-out was completed in February 2018. Under TFC, you must open a childcare account and for each 80p you pay in the Government will pay 20p up to a maximum of £2,000 per child, per year (£4,000 per disabled child, per year). However, you cannot claim tax credits and tax-free childcare at the same time. If you claim TFC, your whole tax credits claim (working tax credit and child tax credit) will end automatically.
Some people will be better off claiming tax-free childcare than tax credits, while others will be better off claiming tax credits and not claiming tax-free childcare. It is important that you understand your options before claiming TFC and ending your current tax credits claim because once your tax credits ends, it is unlikely that you will be able to go back to tax credits, even if you made the wrong choice, and you may need to claim UC instead. Some people are better off under UC when compared to tax credits, others may be worse off. You can find out more about TFC and how it interacts with tax credits on our TFC page.