Can I fund childcare costs via my limited company?

Childcare costs are normally treated as a personal expense and cannot usually be paid for through a limited company as a tax-deductible business cost.

In this guide, we explain how the Tax-Free Childcare Scheme works, the limited company position, and what remains of the old childcare voucher scheme.

Tax-Free Childcare Scheme

The old childcare voucher scheme closed to new entrants on 5th October 2018.

If you were already in a scheme before then, you may still be able to carry on using it.

For everyone else, the Tax-Free Childcare Scheme is now the main government scheme for helping working parents with childcare costs.

The government adds £2 for every £8 you pay into your childcare account, up to a maximum contribution of £2,000 per child per year. For a disabled child, the limit rises to £4,000 per year.

Are you eligible to benefit from the scheme?

Most working people, including company directors and umbrella company contractors, can potentially use the scheme, provided they meet the eligibility rules.

If you have a partner, both of you will normally need to meet the work and income conditions, although there are some exceptions.

Is your child eligible?

The scheme normally covers children aged 11 or under who live with you.

For most children, eligibility ends on 1st September after their 11th birthday. For a disabled child, support can continue until 1st September after their 16th birthday.

Adopted children can qualify, but foster children are not normally covered by Tax-Free Childcare.

You also cannot use Tax-Free Childcare at the same time as Universal Credit childcare support or continue receiving new childcare vouchers.

Earnings restrictions

You and your partner, if you have one, must normally expect to earn the equivalent of at least 16 hours per week at the applicable National Minimum Wage or National Living Wage over the next three months.

There is also an upper income limit. You cannot normally claim if either you or your partner expects to have adjusted net income of more than £100,000 during the current tax year.

There is an important distinction for limited company directors.

Dividend income does not count towards the minimum earnings requirement. For many contractors, this matters because they take a relatively small salary and take the rest of their income as dividends.

However, dividends do form part of your adjusted net income and can therefore affect whether you exceed the £100,000 upper limit.

HMRC may check that you meet the eligibility requirements and can ask for evidence to support your application where necessary.

If your income varies, you may in some cases be able to use an average based on your expected annual earnings.

You can read more about how PAYE works for contractors in our PAYE and payroll guide.

Can your limited company provide childcare directly?

There is one important exception to the general rule that childcare is a personal cost.

An employer can provide childcare through a qualifying workplace nursery without creating a taxable benefit for the employee, provided HMRC’s conditions are met.

The nursery does not necessarily have to be based at the company’s own premises, but the employer must be genuinely involved in providing and managing the childcare arrangement.

Simply getting your company to pay the fees at a nursery you already use will not normally qualify.

For most one-person contractor companies, this route is unlikely to be practical, but it is worth knowing that the exemption exists.

HMRC explains the workplace nursery exemption here.

If your company provides benefits to directors or employees more generally, see our guide to benefits in kind and how they are taxed.

What about free childcare?

You may also be eligible for government-funded childcare, which is separate from Tax-Free Childcare.

In England, eligible working parents can currently receive up to 30 hours of funded childcare a week for 38 weeks of the year, depending on their child’s age and circumstances.

Different arrangements apply in Scotland, Wales and Northern Ireland.

You can use funded childcare and Tax-Free Childcare together, provided you meet the relevant eligibility conditions.

Check the current free childcare eligibility rules before you apply.

How to set up a childcare account

• Visit the government’s Tax-Free Childcare website and create a childcare account.
• If you have a partner, you will normally need to provide their details too. Only one parent can have an account for the same child.
• The government adds £2 for every £8 you pay into the account, which you can then use to pay an approved childcare provider.
• Other people can also contribute to the account, which can help if grandparents want to support childcare costs.
• You can use the money for approved childcare, including nurseries, childminders, breakfast clubs, and holiday clubs.

You need to reconfirm your eligibility every three months. If you do not do this, the government top-up will stop.

The status of pre-2018 childcare voucher schemes

The childcare voucher scheme closed to new applicants in October 2018, but some people are still using it.

If you joined before the cut-off and have stayed with the same employer, you may be able to carry on receiving vouchers while your employer continues to offer them.

The scheme can reduce the amount of Income Tax and National Insurance you pay on part of your childcare costs, although the saving depends on when you joined and your tax position.

You cannot use childcare vouchers and Tax-Free Childcare at the same time, so switching to the newer scheme means giving up the old one.

The government has more information on the childcare voucher rules here.