Keeping your childcare benefits could save tens of thousands. How does it work?

Childcare is often a hefty part of household expenses, particularly when parents are paying for additional care during the day or after school. For many families, government subsidies such as the funded hours or tax-free childcare can provide significant relief for the expenses.  

However, data from the Department for Education shows that number of children eligible for these entitlements is dropping. Across children nine months to two years, the number of children eligible for funded hours dropped by 20,000 in a year. The extension to 30 hours from 15 hours of the free hours childcare scheme was put in place just at the end of last summer. Some of this comes down to a smaller number of children in the age group, but another factor is the salary cap on the benefit, which more and more parents are exceeding due to inflation.  

Income breaching £100,000 for one parent is where these benefits take the biggest hit. Analysis by AJ Bell shows that a parent of a 2-year-old and 9-month-old would have to earn £156,000 before they were better off after tax and deductions than if they earned £99,000 and had access to childcare funding. Income in this instance refers to ‘adjusted net income’. This means any income that is subject to tax, which includes not just salary but investments, savings, or property, less pension contributions and charity donations that qualify for gift aid.  

Some support will start to taper off sooner than this, such as child benefit starting to taper down from £60,000 until it cuts off completely at £80,000. But the £100,000 mark is a cliff-edge where the cumulative loss of different benefits starts is astonishing.

Staying below £100,000

Trying to keep earnings below £100,000 each year sounds like a nice problem to have, but even a small breach of the limit can cost tens of thousands in lost support. One of the most important steps for parents looking to take advantage of the benefits is to make sure you’ve disclosed all earnings to your partner. If one parent claims support but is not aware their partner is in breach of the earnings limits, you could find yourself repaying a hefty bill.  

Pension contributions are one of the most helpful tools for staying below the £100,000 cliff-edge. You don’t have to pay income tax on contributions up to the lower of £60,000 each year or 100% of your annual earnings, though these contributions start to taper down for those that have both a ‘threshold income’ over £200,000 and an adjusted income over £260,000. However, by this point you’d likely have more expendable income with the higher salary than through the childcare benefits.  

Contributing to your pension becomes a bit of a triple benefit for those hovering around the £100,000 mark, because you are not only keeping hold of the value of childcare support, but also boosting your retirement savings and keeping the full value of your tax-free personal allowance.  

For example, let’s say Bella is self-employed and has two children. Near the end of the tax year, she realises her profits (and therefore taxable earnings) will be close to £100,000. So, she decides to contribute an additional £8,000 of her income to her SIPP. This means a total £10,000 gross contribution would be in her pension thanks to basic rate tax relief and help her ensure her adjusted net income stayed below £100,000.  

Other factors to keep in mind are income from investments and savings. Keeping as much as possible in ISAs helps avoid complications here because you will not face income tax on investments inside an ISA wrapper.  

What support could you be eligible for?

There are three main benefits parents that most parents can access, each with slightly different rules. These are the basics, but it’s worth exploring further if you think you might be eligible for something you aren’t currently claiming and how the rules might apply to you. These are the rules that apply in England, but there are different childcare funding allowances available across the UK.

Tax-free childcare

This can be worth up to £2,000 per year per child, or £4,000 if a child has a disability. For every £8 you contribute to the tax-free childcare account, the government will contribute £2 and this money can be used to pay registered childcare providers directly. While both parents need to be working, if one parent has a net adjusted income of over £100,000, they are no longer eligible. If both parents individually have adjusted net incomes under £100,000, even if they make £90,000 each, they are eligible. You can claim for tax-free childcare until the September after your child’s 11th birthday, or the September after your child turns 16 if they are disabled.

Child benefit

You may be eligible for child benefit, which is a weekly rate of £27.05 for the eldest child, and £17.90 for any additional children. Only one parent can claim the benefit, and families with a parent who has an adjusted net income of £80,000 will not be eligible for any child benefit payments. You can claim child benefit for bringing up a child who is under 16, or up to 20 if they stay in approved education or training.

The amount you are eligible for will start to reduce once one adult, including a stepparent or partner, in the household where the child lives makes over £60,000, by 1% for every £200 you earn over the threshold. But this doesn’t mean you’ll just be paid less. You’ll be paid the same amount and then you'll need to pay any amount you owe back. If you are in this £60,000 to £80,000 zone, it’s essential that you keep track of what you need to pay back so you aren’t left with a surprise bill. If you don’t want to track over the year, you can now also pay the charge throughout the year through PAYE.

Free (funded) hours childcare scheme

All parents in England with children three to four years old will have access to 15 hours of childcare each week for 38 weeks of the year, regardless of income. To access the full 30 hours of free childcare for any child nine months to four years, parents will need to be working and on track to earn at least £2,643.68 over the next three months if they are over age 21. In addition, no parent can have an adjusted net income over £100,000.  

If you’re a parent that is hovering on the £100,000 limit, this is where the majority of savings can come into play. Here’s how much a couple could save by using these hours, allowing for the 15 hours of universal access for three to four-year olds.