Contributions to Tax-Free Childcare accounts rise but many parents aren't using the scheme

Fewer than half of open Tax-Free Childcare accounts are used - could you be missing out?

Mum and child with piggy bank
(Image credit: Getty Images)

Increasing numbers of parents are putting money into government-backed Tax-Free Childcare (TFC) accounts to help with childcare costs but many eligible families are still not making full use of the accounts.

The government launched TFC accounts in 2017 to replace childcare vouchers.

Parents can get up to £2,000 a year in cash from the government to help pay for childcare including childminders, nursery costs and after-school clubs.

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The latest HMRC figures show the government spent £165.9 million on top-ups for families in the first quarter of 2024, £11.2 million higher than a year before.

But the number of families using the accounts has been dropping each month.

Account use increased from 54.8% in October 2023 to 55.3% in January 2024, HMRC data shows.

But It fell in February to 51.5%, and again in March to 49%

Rachael Griffin, tax and financial planning expert at Quilter, says this underutilisation shows that many families, including those with children who could greatly benefit from such support, are not fully taking advantage of the available funds.

She says some parents who are eligible for Universal Credit or Tax Credits may open accounts but find they can save more money using the childcare elements of these benefits instead.

“The amount of money available from government has remained the same since 2017 despite childcare costs spiralling during that time,” she adds.

“While every little helps, the overly complex system as it stands will inevitably put off some parents.

“Tax-Free Childcare is not benefiting enough families. Many who have opened accounts are not using them, and there are still eligible families who haven't even opened an account. More needs to be done by the government to both increase its funding to make it fit for purpose and advertise it better.”

Approximately 523,000 families used TFC accounts for 636,000 children in January 2024, which compares with 492,000 families using the accounts for 592,000 children in October 2023 - the previous quarter’s peak

Account usage remains low even when accounts are open though.

This may be because some families open an account for a child and then decide not to use it or will use one that has already been opened for a sibling.

Laura Suter, head of personal finance at AJ Bell, says government campaigns and media coverage have boosted TFC awareness but usage is below expectations from the Office for Budget Responsibility (OBR) when the scheme first launched.

"It’s a far cry from the £1 billion a year that the OBR estimated the Government would be spending on the policy when it was launched," she says.

“In total the OBR estimated the government would shell out £4 billion over the first five years the accounts were in circulation, but the reality is that in that period it spent just over £1 billion.”

How Tax-Free Childcare accounts work

TFC accounts were launched in 2017 to help parents with children up to age 11 pay for childcare services.

Unlike its childcare voucher predecessor, the money isn’t taken as a form of salary sacrifice from your pay packet so can’t be used to reduce your tax.

Instead, parents have to open a TFC with HMRC for each child. 

Your child must be under age 11, or 17 if they are disabled.

Once an account is open, the government will contribute £2 for every £8 contributed. 

If you pay in £800, the government will give you £200 up to an annual topup limit of £2,000.

The topup limit for parents of a disabled child is £4,000 a year.

Parents must be working and earning the minimum wage for 16 hours a week or more but there is a £100,000 salary cap.

This applies to each parent so if one earns £105,000 but the other doesn’t work, you can’t get the vouchers, while a couple earning £90,000 each can.

“Lots of parents aren’t aware of the scheme, don’t understand how it works or don’t realise they are eligible and miss out on the invaluable support as a result,” adds Suter.

“Childcare costs will be a key battleground the election and it wouldn’t be surprising to see the tax-free childcare scheme consigned to the scrapheap in favour of a simpler, more generous scheme to help parents with childcare costs that often prevent them returning to work after having children.”

Griffin adds that a simplified approach which consolidates all forms of childcare support into a single online account for each child would help parents navigate the system better and take advantage of what’s on offer for them.

Marc Shoffman
Contributing editor

Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and The i newspaper. He also co-presents the In For A Penny financial planning podcast.