How does it 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.
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 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 claim £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 NI 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 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. HMRC provide a childcare indicator that can help you decide if you are better off taking childcare vouchers or not. If you use the calculator, you should print a copy of the results and ensure the information you enter is as accurate as possible.
Tax credits and universal credit
Both working tax credit and child tax credit are gradually being replaced by universal credit. You cannot claim both together. Universal credit is being rolled out across the UK. Eventually, everyone who is claiming tax credits will be moved across to universal credit. You can find out more about the introduction of universal credit in our main tax credits and benefits section. You can find out more about childcare support in UC on our universal credit and childcare pages.
Tax credits and free childcare (England only)
All 3 and 4 year olds in England currently receive 570 hours of free education or childcare per year. This is around 15 hours a week. From September 2017, working parents have been entitled to 30 hours free childcare in England if certain conditions are met. Some 2 year olds from low income families are also eligible. 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 was introduced in April 2017 and the gradual roll-out was completed in February 2018 meaning that anyone who meets the qualifying conditions can now use the scheme. 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 £2000 per child per year (£4000 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. Due to the roll-out of universal credit, it is important that you understand your options before ending your tax credits claim as if you make the wrong choice you may not be able to re-claim tax credits and instead may be forced to claim universal credit which is gradually replacing tax credits. You can find out more on our TFC page.