Increasing numbers of parents are putting money into government-backed Tax-Free Childcare accounts to help with childcare costs, but many eligible families are still not making full use of the accounts.
The government launched Tax-Free Childcare 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, after-school clubs and summer activity camps.
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About 826,000 families used Tax-Free Childcare for 1,085,000 children in the 2024-25 financial year, according to the latest HMRC figures.
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This compares to 740,000 families (966,000 children) in the year before.
In March, the government spent £55.3 million on the scheme, which was £7 million lower than its peak level of £62.3 million in July 2024, reflecting the increased availability of funded childcare.
Parents are now entitled to 15 hours of free childcare per week once their child turns nine months old, thanks to government reforms.
However, while more families are using Tax-Free Childcare to pay for childcare costs overall, the percentage of accounts used each month has been falling.
Account use dropped from 54.8% in October 2023 to 51.5% in February 2024, and then to 49.2% in March 2025.
Rachael Griffin, tax and financial planning expert at the wealth manager 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 adds that 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 comments.
“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.”
It’s estimated that about 800,000 eligible families are missing out on the scheme.
Why are Tax-Free Childcare accounts being opened but not used?
Only about half of Tax-Free Childcare accounts are used every month, according to HMRC.
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.
HMRC points out that the government-funded 15 or 30 hours childcare and Tax-Free Childcare have a joint application process, which means many families find that they are also eligible for Tax-Free Childcare and an account is opened for them, which they may not use.
It also says that Tax-Free Childcare accounts may be used once a school term, or every quarter, rather than every month. For example, at the start of a school term, a family might make a payment for the whole period covering after-school club and/or breakfast club.
Laura Suter, director of personal finance at the investment platform AJ Bell, says government campaigns and media coverage have boosted Tax-Free Childcare 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 - or 16 if they’re disabled - pay for childcare services.
According to HMRC, there are now 75,000 childcare settings accepting Tax-Free Childcare as payment including nurseries, registered childminders, holiday activity clubs and, for when school starts back in September, before and after school clubs.
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 account with HMRC for each child.
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 top-up limit of £2,000. The top-up limit for parents of a disabled child is £4,000 a year.
Any unused payments can be withdrawn at any time.
Parents must be working and earning the minimum wage for 16 hours a week or more to qualify for TFC, 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, they won’t be eligible for TFC. However, a couple earning £90,000 each would qualify for the scheme.
Account holders must confirm their details are up-to-date every three months to continue receiving the government top-up.
“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.
HMRC is urging families to check if they are eligible and sign up if they are. The scheme has previously been criticised for not being widely available among childcare providers. For example, some providers may accept the old childcare vouchers, but not payments via TFC.
However, this is changing, with a growing number of childcare providers and activity clubs accepting TFC. Even if they don’t advertise taking payments this way, it’s worth asking.
Myrtle Lloyd, HMRC’s chief customer officer, comments: “Whether your child is interested in football, climbing, crafting or dance, there’s a huge variety of childcare settings accepting Tax-Free Childcare.
“Children can learn something new and have fun with their friends while their parents save on their childcare bills. Visit GOV.UK to sign up.”
