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, and also look at the status of the pre-2018 childcare voucher scheme.

Tax-Free Childcare Scheme

From 5th October 2018 onwards, the old childcare voucher scheme was closed to new entrants.

Parents who were already members of a voucher scheme and received their first voucher before the closing date are still eligible to use the old system.

For everyone else, the Tax-Free Childcare Scheme provides support with childcare costs.

The Government pays £2 for every £8 you pay to a childcare provider, providing support of up to £2,000 per child per year. If you have a disabled child, the support increases to £4,000 per year.

Are you eligible to benefit from the scheme?

Most working people, including company directors and umbrella company contractors, are eligible to use the scheme, subject to some restrictions.

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Is your child eligible?

• The scheme is open to children who are 11 or under and usually live with the applicant.
• Eligibility ends on 1st September after the child’s 11th birthday.
• Adopted children are eligible, but not foster children.
• You cannot apply if you are already using an old childcare voucher scheme at the same time.

Earnings restrictions

• Over the next three months, you expect to earn income equivalent to working at least 16 hours per week at the National Minimum Wage.
• Your adjusted net income must generally be less than £100,000 during the current tax year.
• For most limited company directors, eligibility is assessed primarily by reference to earnings from employment rather than dividend income. However, dividends may still affect your adjusted net income when determining whether you exceed the £100,000 income limit.
• If your monthly income varies, you can use a predicted average based on your annual earnings.

What about free childcare?

You may also be eligible for free childcare, which is separate from the Tax-Free Childcare Scheme.

Government-funded childcare is available for eligible children from as young as 9 months old through to school age, subject to the child’s age and the parents’ circumstances. The number of funded hours available depends on eligibility.

If you have young children, you can benefit from both incentives, subject to the relevant eligibility criteria.

How to set up a childcare account

• Visit the Government’s Childcare website and create an account using your Government Gateway ID.
• When you apply, you must also include your partner’s details. Only one parent can open an account per child.
• The government will add £2 for every £8 you pay into the account, for payment to an approved childcare provider.
• Other people can contribute to your child’s online account, which can be useful if grandparents wish to help.
• The funds can also be used for approved after-school clubs, holiday clubs, summer camps and play schemes.

The status of pre-2018 childcare voucher schemes

The old childcare voucher scheme closed to new entrants in October 2018.

Parents already enrolled in a scheme can continue to benefit, as long as they remain eligible and stay with the same employer.

Under the old childcare voucher scheme, employees could receive tax and National Insurance relief on qualifying childcare vouchers, subject to the rules and limits in force at the time they joined the scheme.

Importantly, if you apply for the Tax-Free Childcare scheme, you can no longer claim childcare vouchers or directly contracted childcare at the same time.

You can find out more, and use a calculator to see whether you’re better off remaining with the old scheme or switching, here.