Can I fund childcare costs via my limited company?

Childcare costs cannot generally be paid for by your business – for obvious reasons. However, company directors and other employees can usually claim personal tax relief via the Tax-Free Childcare Scheme.

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 tax relief for parents.

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

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 16 hours per week on the National Minimum Wage.
• Your adjusted net income is less than £100,000 during the current tax year.
• Some types of income – such as interest – cannot be included – notably dividends. This means that you must use your annual salary to work out if you’re eligible.
• If your monthly income varies, you can use a predicted average earnings based on your annual income.

What about free childcare?

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

Free childcare, funded by the government, is available for 2 to 4-year-olds.

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

How to set up a Childcare account

• Simply visit the Government’s Childcare site, and set up a new 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 is handy if grandparents are keen to help!
• The funds can also be used for approved after-school and 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 stay with the same employer.

Under the old voucher scheme, your company could pay you £243 a month tax-free towards childcare if you joined before April 2011. After this date, the amount was based on the employee’s earnings with restrictions for higher earners.

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

You can find out more, and use a calculator to see if you’re better off staying with the old scheme or not here.