Increase in Families Employing Tax-Free Childcare yet Thousands of Parents Remain Unserved
In the 2024-25 financial year, approximately 826,000 families used Tax-Free Childcare for 1,085,000 children, marking an increase from the 740,000 families (966,000 children) who used the scheme in the year before. However, it's estimated that about 800,000 eligible families are missing out on the scheme, with underutilization commonly due to lack of automatic enrollment, complex paperwork, and awareness barriers.
Tax-Free Childcare accounts can be opened for each child and are accepted by 75,000 childcare settings, including nurseries, registered childminders, holiday activity clubs, and before and after school clubs. Parents are now entitled to 15 hours of free childcare per week once their child turns nine months old. To qualify, parents must be working and earning the minimum wage for 16 hours a week or more, with a £100,000 salary cap per parent. The government contributes £2 for every £8 contributed to a Tax-Free Childcare account, up to an annual top-up limit of £2,000 for non-disabled children and £4,000 for disabled children.
Employers must establish formal plans and notify eligible employees, which doesn't always happen efficiently, causing missed opportunities for families. Paperwork and reporting, such as filing plan documents and tax forms, are essential to qualify and maintain these tax benefits. Families may find these requirements onerous or confusing, leading to underuse.
To address this issue, HMRC is urging families to check if they are eligible for Tax-Free Childcare and sign up if they are. Myrtle Lloyd, HMRC's chief customer officer, encourages families to visit GOV.UK to sign up for Tax-Free Childcare. It's worth noting that some childcare providers may not advertise accepting Tax-Free Childcare payments, but it's worth asking if they do.
Parents can get up to £2,000 a year in cash from the government to help pay for childcare. Parents must confirm their details are up-to-date every three months to continue receiving the government top-up. Tax-Free Childcare accounts can be used once per school term or every quarter, instead of monthly. About half of Tax-Free Childcare accounts are used every month, according to HMRC. Unused payments in a Tax-Free Childcare account can be withdrawn at any time.
The government launched Tax-Free Childcare accounts in 2017 to replace childcare vouchers. In March 2025, the government spent £55.3 million on the scheme. Despite this, the government spends less than expected on the Tax-Free Childcare scheme, with a total of just over £1 billion spent in the first five years compared to the estimated £4 billion.
In conclusion, while the Tax-Free Childcare scheme has seen an increase in usage, there is still a significant number of eligible families that are missing out. By encouraging proactive opt-in actions, simplifying paperwork, and improving awareness, more families can benefit from this government-funded support.
- To maximize personal-finance benefits and secure education-and-self-development opportunities for their children, it's essential for eligible families to investigate and sign up for the Tax-Free Childcare scheme if they haven't already, as a large number of families may be unaware they are missing out on this government-funded support.
- For those wishing to manage their personal finance effectively, understanding and utilizing the Tax-Free Childcare scheme can provide significant assistance with covering childcare costs, as families can receive up to £2,000 per year from the government to help pay for childcare, making personal-finance education and management even more critical for families with young children.