Experts warn that parents are missing out on £2,000 a year in childcare

FINANCIAL experts have warned that parents are missing out on £2,000 a year in childcare.

To mark Playday 2025 on Wednesday August 6th, HM Revenue and Customs (HMRC) has announced it is encouraging working families to save money by signing up to Tax-Free Childcare and using one of the thousands of facilities accepting it as payment.

Tax-Free Childcare means working families can save up to £2,000 annually for each child up to the age of 11, and £4,000 for a disabled child up to the age of 16, when they’re paying for their childcare.

Families yet to sign up for Tax-Free Childcare can do it now to pay for their summer activities or start paying into it ready for breakfast and after-school clubs when the new term starts.

Once families have opened a Tax-Free Childcare account, they can deposit money and use it straight away or keep it in the account to use it whenever it’s needed. Any unused payments can be withdrawn at any time.   

For every £8 deposited in a Tax-Free Childcare account, the government tops it up by £2, which means parents can receive up to £500 (or £1,000 if their child is disabled) every 3 months towards their childcare costs.

Families could be eligible for Tax-Free Childcare if they:   

• have a child or children aged 11 or under. They stop being eligible on 1 September after their 11th birthday. If their child has a disability, they receive up to £4,000 a year until 1 September after their 16th birthday   
• the parent and their partner (if they have one) earn, or expect to earn, at least the National Minimum Wage or Living Wage for 16 hours a week, on average   
• each earn no more than £100,000 per annum   
• do not receive Universal Credit or childcare vouchers    

Philly Ponniah, Chartered Wealth Manager and Financial Coach at London-based Philly Financial, said many parents just do not know they are eligible.

She added: "As a financial coach, I see far too many parents miss out on Tax-Free Childcare, not because they’re ineligible, but because they don’t realise how “adjusted net income” works. 

"Many assume earning close to £100k means they’re automatically excluded, but with the right planning, it’s often possible to stay under the threshold and still qualify. 

"The system is complex, and families shouldn’t have to navigate it alone or find out too late that they’ve lost thousands in support. I get multiple enquiries on this topic every week so some improvement on government guidance would help."

Molly Pile, Chartered Financial Planner at Fernbank Wealth, also in London, said there is “no catch” to the childcare help.

She continued: "Tax-free childcare is super simple to use, and lots of childcare settings now link up their own apps to your Gov.uk Childcare account to automate the monthly payments directly. Most parents just do not know it's on offer or that it applies to them. 

"You simply transfer 80% of the required amount into your Gov.uk childcare account, where it is automatically topped up with the remaining 20%. You need to remember to reconfirm your details every 3 months, which the system prompts you to do. 

“It's easy to use, and even small savings are worthwhile. Those with bigger childcare fees could be saving over £160 every month for each child. With lots of childcare settings increasing their prices, tax-free childcare is becoming even more valuable. There is no catch, as long as you earn the national the national living wage for 16 hours per week, up to £100k per annum, you are likely to be eligible.”

Chloe Phillips, Certified Financial Planner & Financial Coach at York-based The Money Makeover, said there is a “huge awareness gap”.

She added: “I use Tax-Free Childcare to cover wraparound care, and I’m always surprised by how many parents I speak to think the scheme ends once nursery is over. When I received my first invoice from our primary school for breakfast and after-school club, there was no mention of Tax-Free Childcare being an option. I had to ask the school directly.

"There’s still a huge awareness gap. As a Financial Coach, I often come across high earners who assume they’re not eligible if they earn over £100,000. But with careful financial planning, such as making personal pension contributions to reduce adjusted net income, they can bring their income below the threshold and qualify for the support. The savings can really add up.”

Though Ross Lacey, Director & Independent Financial Adviser at Rayleigh-based Fairview Financial Management, criticised the fact parents earning over £100,000 a year are not eligible.

He said: “Tax-Free Childcare is a valuable benefit. However, the way in which it becomes totally unavailable if one or both parents earn over £100,000 is frustrating. There are scenarios where a couple earning £99,999 each, with two children can claim £4,000 Tax-Free Childcare each year. 

"Another couple where one parent doesn't work and the other earns £100,000, can't claim anything. Added to the '60% tax trap', that those earning between £100,000 and £125,140 face, this makes for some valuable financial planning opportunities. There are ways to bring down net adjusted income to below £100,000 and reclaim Tax-Free Childcare and not pay 60% on that portion of income, a key one being to make pension contributions. 

"This is a complex area though, and care needs to be taken with factoring in any other income and taxable benefits to ensure the pension contribution amount if sufficient to make a difference, and of course that it's suitable for the individual based on their own circumstances.”

Samuel Mather-Holgate, Independent Financial Adviser at Swindon-based Mather and Murray Financial, said: “Lots of families are unaware of this scheme so despite the generosity and flexibility of it, it’s significantly undersubscribed. If you have young children, start using this straightaway. It’s just like tax relief on your pension, but you can withdraw the money (minus the bonus) if you don’t use it.”